Did Overdraft Protection Cause This Nightmare?

Did Overdraft Protection Cause This Nightmare

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Did Overdraft Protection Cause This Nightmare?

Most banks today offer what is called overdraft protection. Thus when a customer writes a check in excess of what he or she has in the bank, the check will be honored (paid by the bank).

Sounds like a good deal, doesn't it? After all, if you write a check beyond your balance, you don't want it to "bounce," do you? There would be penalties for the returned check and charges from the merchant as well. So why not take the overdraft protection?

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I have counseled many couples who did take the overdraft protection and got deeply in debt as a result of it. The people who regularly overdraft are those who don't know their checkbook balances. Obviously there are those who are dishonest and purposely overdraft, but they are a minority and usually can't get overdraft protection anyway.

The overdraft protection is an enticement for couples to avoid balancing their checking accounts. Several people I have counseled were startled to find out that overdraft protection wasn't a benevolent act on the part of the bank. The overdrafts (and penalties) were charged to their credit account at 18 to 21 percent interest. Often those accounts accumulate interest from the date of transfer, not after the normal thirty days common to credit card accounts.

I don't want to impugn the integrity of all finance companies, because there are many honest and ethical companies in business. But in general, local finance companies, especially those not regulated by federal laws, use high pressure tactics in their operation and charge very high interest. For instance, in many states finance companies that limit their loans to $600 or less can charge interest rates that go as high as 40 percent per year!

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