A few years back, I used to work in a small bank and I remember a customer who owned a lawn-care company who seemed to be in there everyday. He was bad with a checkbook at best. He bounced checks left and right and I still remember my boss bragging about how much money he had made off that guy. Over a thousand dollars in a year – all in overdraft fees. Something just didn’t seem right. Clearly the customer needed to get a little bit more organized with his finances, but it seemed like the bank should have taken a different approach…
New Federal Regulation on Bank Overdraft Fees
Recently Consumer Reports released an article discussing the new Federal law pertaining to banks and their overdraft services. Not sure if the motivation for the new regulation was customers like the one above, but I think it is probably a good thing.
Believe it or not, that $35 fee that the bank charges you when you overdraw your account is actually a “service” that your bank is offering you. They care so much about your well being that they want you to be able to buy that Snickers bar without being told that you don’t have the money in your account. 
And then they charge you $35 when you spend 50 cents more than you have in your account.
Starting this summer (July 1st for new cards and August 15th for existing accounts) customers will have to opt-in to get overdraft protection on their account. So rather than getting charged $35 for that Snickers bar, your card will be declined. Some people will still prefer not to have their card declined, but you can bet that people are going to save a lot of money (and banks will lose a lot of money) without the automatic opt-in that many banks currently have.
How to cut your Overdraft fees now
If you don’t want to wait around until the Federal regulations kick in, you can try to see if your bank will allow you to opt out now. Some will allow it.
But even if they don’t check to see if they have an overdraft program that pulls from a savings account instead. For my offline checking account, our checking is linked to our savings. So if we do go over, it automatically moves money from our savings. It isn’t free – they charge $2 each time, but that sure beats the $35 overdraft fee.
An even better way to minimize Debit-Card Overdraft fees
We use ING Direct as our primary checking and savings account (and budgeting system) and one of the reasons I love ING so much is that they don’t have overdraft fees on their checking account. You can go below zero and they charge you interest (just like a temporary loan) on any balance below $0. So if we happen to go below zero for a day or two and then transfer the money over it costs us about 20 cents – as opposed to $2 or even $35. Not a bad deal at all…
{ 8 comments… read them below or add one }
In general, this looks like a good piece of legislation. While it may be tempting to keep the overdraft priviledge just in case, what we really need to be worried about is the rapid fire, multiple OD fees on every charge near the one that puts you in over draft status.
I’m with Kevin here. The overdraft fee of $35 is one thing, but often that messes up so much more than a simple $35. Going over a couple bucks can easier turn into a couple hundred bucks and utilities being turned off (because of automatic withdrawal issues) if you’re not careful.
-Marshall Jones Jr.
Kevin and Marshall echo my idea about multiple fees. I’ve seen family members attacked by this and it hurts big time. One solution is to know how much is in your account and not spend more than that. My bank offers alerts to your email or cellphone telling you when the balance drops below a preset level. You can wake up every morning to a text message with your balance.
See my blog about this same thing – http://newfromclt.blogspot.com/2009/09/debit-cards-and-overdraft-fees.html
The best plan to avoid any bank fees on overdrafts is to follow a budget, track your day-to-day expenses, and then have a cash cushion in your checking account (say around $500). This would be like having a mini-emergency fund built into your checking account. I think it’s also a wise idea to have your savings and checking accounts linked in the case of an overdraft in checking.
Great post Bob. That is why banks have to be regulated. What they call a “curtesy fee” is really them being a loan shark. Especially when the game the system by clearing the largest debit first.
Don’t rely on text messages or even your account’s web page. For U.S. Bank, these lag behind the event (be it deposit or debit) by as much as 5 days. And even if the bank sends a text saying a deposit has been applied to the account, they have been known to actually put a hold on that very deposit. They have even put a 2-day hold on a $30 *cash* deposit. This really hurts the younger bank customers (such as college students) who understand technology to the point where any delay in their banking information just doesn’t make sense to them. Sorry Randy — it is not so easy to really know what you have in your account.
Sandra, you’re right, college students don’t understand that at all. They expect it all to be instant. Fortunately, a lot of these college students don’t do a lot of “traditional” banking, so they aren’t impacted by things like checks and deposits.
At least at my bank, I can tell when a deposit is held. The alerts are not a substitute for some good old fashioned money management, but it’s close. And if it’s all you’ve got, it’s all you’ve got.
Of course, there is a good alternative – cash…
Oooh. I hate that! We thought “overdraft protection” on our checking account was such a great idea. Our bank automatically loans us money deposited into our account. And the loan amounts seem to be picked out of thin air. Two dollars overdrawn and the bank deposits $70 into our account, and then turns around and charges %20 interest on that $70. That was the original scheme. Then we were sent a letter telling us that not only would this still be the practice, but that there would be also be a $12 fee every time that the bank “had” to loan us money. Rawr.
Lord knows how much money they’ve made on us these last 9 years, but we’re older and wiser now and I will be sending a fax in on Monday to have the service completely and permanently removed from our account.