Checking Account Overdraft Fees From Your Bank Are Worse Than Payday Loans

by Hank

A friend recently told me that he was having trouble making ends meet.  He let me see a copy of his most recent bank statement, and I was blown away by how many overdraft fees that he had been charged by his bank.  In the span of two weeks, he had six insufficient fund fees charged against his checking account.  One of the charges came when he used his debit card to pay $6 for a hamburger at a fast food restaurant.  That expensive burger should have come with its own white table cloth and tuxedoed waiter instead of the Happy Meal .

bounced-checkAccording to the Consumer Federation of America’s recent bank fee survey, the cost of a $100 overdraft repaid in one week costs $70 or the equivalent to a 3,640% APR.  Stop and think about that for a minute.  Overdraft fees are not calculated on an annual scale, but if they were the fees to “borrow” money because you bounced a check can equal over three thousand percent!  Even the horrible Payday loan villains only charge 456% annual interest on their two week loans.  At those rates, a 25% interest rate on your credit card looks awesome!

Many people have been burned by a bank that will let customers rack up a lot of small overdrafts instead of one small one to generate more fees.  Banks have been accused of shuffling the checks you write around, clearing the larger one first and letting you bounce the little checks in an effort to generate fees and subsequently their own revenues. 

45% of banks say that the revenue that they generate from overdraft fees is greater than their other sources of income.  The average overdraft fee is $35 per bounced check.  Banks brought in over $38.5 billion in overdraft fees this past year.  35% of checking account users have had at least four overdrafts on their accounts.  11% of all bank customers are chronic serial overdraft users.

There are several things you can do to prevent yourself from falling victim to the banks’ evil fee scams.

Use Direct Deposit.  Receiving you paycheck directly into your checking account can help you avoid the posting delays between when you deposit your paper paycheck and when your account updates.  Don’t play the float.  Almost all banks have changed how they post checks thanks to the power of computers, and the delay has been cut down drastically.  You will get burned

Keep Track of Your Balance.  Be cognizant of your pending transactions.  Pending transactions have not cleared your bank account.  You cannot withdraw month or write a check against a pending deposit.  The pending money is not technically in you bank account yet.  Do not spend that money until it is officially yours to do so.

Keep a Safety Net In Your Account.  I used to love the old checking accounts that actually had a minimum deposit requirement.  A lot of younger people will not remember this (my mom will think that it is amazing that I even do), but many banks required you to keep a minimum account balance in your checking account before they would let you have one.  There used to not be anything as free checking.  Free checking is an advertising ploy that was created in the last decade or so to bring in new business.  But, in the olden days of the 1990s and before, you had to keep a minimum, $1,000 for example, in your account at all times.  That was the rule, and everyone had to adhere to it.  You put that money in there and forgot about it.  It stunk having that much money tied up in your zero interest earning checking account at the time, but it kept you out of trouble.  You didn’t bounce many checks because you had a big safety net.  You should do the same with your free checking account.  Deposit $500 in there as a safety net and forget about it. 

Link To a Savings Account.  Many banks now offer overdraft protection for a very small fee or for free.  Overdraft protection will link your checking account to a savings account.  If you accidentally withdraw more money than your checking account has in it, then your bank will take money from your savings account to cover the difference.  While this is not the optimum solution, this will keep you out of trouble and keep you from racking up the overdraft fees.

There is a movement in Congress to reform the nasty fees banks levy on their customers.  But, until legislation passes and even afterwards, checking account holders must remain careful to ensure that they are not gauged by controversial bank fees that encourage consumers to fall into debt on their checking accounts.

{ 1 comment }

Jerry November 27, 2009 at 9:15 pm

This is a great point… those fees from the bank are not in place to “help” you if there is an accidental overdraft, they are there to lead to additional revenues for the bank! The best insurance for avoiding this is either to spend cash only, or to be hyper-aware of the amount of money in the account. (Or both!)

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