Overdraft Protection Pros and Cons
Author: Susan Willis
Author: Susan Willis
A bank overdraft simply refers to the situation whereby the account owner writes a check, withdraws cash, or uses a credit/debit card in an amount that exceeds the actual balance in the account. (For example, writing a check for $100 when the checking account only has $50 left in it).
Throughout most of the history of banking, people did not have access to debit or ATM cards. Rather, they wrote checks. When they wrote a check that presented the bank with an overdraft situation, the bank would simply refuse to honor the check. This would result in one or both parties involved in the transaction - both the writer and recipient of the check - being liable to pay an overdraft fee of $100 or more, in many cases.
Fast forward to about a decade ago, when some savvy bankers hatched a scheme called overdraft protection to get more customers (and make more money in fees). By its name alone, overdraft protection sounds initially like it is something that is actually protecting the account holder. Well, this is both true and untrue, for it depends upon what you mean by "protection." On the one hand, overdraft protection does protect the account holder in terms of not having their check (or debit transaction) get rejected by the bank. In other words, the bank will still honor the transaction even if the account is overdrawn.
However, there is another side to this coin. Even though the bank honors the transaction (by paying any portion that is overdrawn up to a prescribed limit), the bank also immediately and automatically charges the account holder an overdraft fee of $25, $35 or more. This does not sound like much money, but it can easily add up to hundreds of dollars a year in fees. Even a small transaction that overdraws the account by just a few additional dollars can incur this hefty fee - automatically.
So, the term overdraft protection is a bit of a wolf in sheep's clothing. It sounds like it is in place to help protect the bank customer, when in reality it may actually hurt them more than it helps. It hurts them because it causes them to pay a large dollar amount to the bank in the form of fees each month.
To add insult to injury, studies have shown that many large banks practice something called transaction stacking, whereby they re-arrange the order in which transactions are processed on a given day in order to increase the chances of more overdraft fees being charged. In this scenario, these banks will process larger transactions first, which can cause the account to become overdrawn. Then, they process the remaining, smaller transactions, which then triggers the overdraft charge 2, 3 or more times.
Another consumer gripe: banks tend to enroll people in these programs automatically. (This automatic-enrollment practice may be changing, however, due to new congressional legislation).
In summary, here are some overdraft protection pros and cons:
Pros:
1. The bank will cover your check or debit transaction so that the payee does not become inconvenienced and you do not need to do the transaction over again.
Cons:
1. Transaction stacking can result in your paying fees multiple times in a single day if your account becomes overdrawn, potentially adding up to $100 or more in fees alone on a single day.
2. Debit card transactions are allowed to be processed, even if a bank account is overdrawn. With overdraft protection, your bank will not reject these transactions (which it otherwise would if this type of protection were not in place). The result: you could end up paying $38 for a $3 cup of coffee.
Fortunately, some banks are now sprouting up that do not charge overdraft fees, ever. Instead, for a small monthly checking account fee, they will cover any and every overdraft you have (up to a prescribed limit) without ever charging you a fee.About the Author:
Here's a checking account that will never charge you overdraft fees - ever. Check out:
http://www.escape-overdraft-fees.com/.
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