Money Management – Bank Overdrafts Can Be a Killer

Several Internet sites reported some bleak financial news this morning. It seems that U.S. banks were on a pace to rake in $38.5 billion in customer overdraft fees this year.

Sadly, the vast majority of that $38.5 billion was likely to come from the consumers who can least afford it.

That includes young, cash-strapped college students.

Bank Overdrafts

Whether you write a check, withdraw money from an ATM, use a debit card to make a purchase or make an online electronic payment for an amount greater than the amount of money you have in your bank account, you in essence are attempting to “overdraw” your account.

Banks can do one of two things at that point, they can either pay the amount requested or decline to do so. If the bank fronts you the money to complete the transaction, they will then charge you an “overdraft” fee.
Most people think overdraft protection is a good thing. First of all, if a bank returns a check without paying it, instead of an overdraft fee, you will likely be charged a “bounced-check,” or “insufficient funds,” fee. In addition, the company that you sent your check to may also charge you a “returned-check” fee. That decision is separate from any made by a bank.

Second, with debit cards, it can be pretty embarrassing to be at the checkout counter with items in hand only to have your purchase rejected for insufficient funds.

So ultimately, most people like to work with a bank that will provide overdraft protection. Such a set up means no returned check fees and less potential public embarrassment.

But it places you at the mercy of the bank and their overdraft fee policies. According to the Financial Times, nationally the median cost of an overdraft fee is 26 dollars. At the larger banks, the median fee is 33 dollars.

Remember your statistics here. The median is the middle number in a list – so one-half of all fees are less than the median but another half exceed that value.

In fact, according to the Financial Times, at Bank of America, “a client overdrawn by just six dollars could incur a 35 dollar overdraft fee that can be levied up to ten times in a single day.”

Most Common Mistake

The reason that most people overdraw an account is they have failed to keep track of how much money they have in that account. Keeping any account register up-to-date, checking, debit or other, can be a real pain.

But to be certain of your status, it is imperative that you record all of your checks at the time you write them. It is also important to record those other transactions, debit card or online payments (automatic ones as well), at the time you make them. The ease with which money can be spent in such a manner often leads to the omission of a specific record or two.

And, if it happens, you must not forget to subtract any fees you have been assessed.

At the end of each bank cycle, reconcile your account with your bank statement. Any discrepancies should be dealt with immediately.

Mistakes Happen

If at some point you do overdraw an account, make a deposit as soon as is possible. That deposit must cover both the overdraft fee and the amount the account was overdrawn.

The failure to reconcile the issue quickly often leads to additional overdrafts and fees. In some simple cases, banks charge a flat fee per day (in addition to the overdraft fee) for each day the account remains overdrawn.

And remember, the overdraft fee kicks in on every transaction when you have exceeded your account balance. You might expend as little as $10 for another transaction yet get hit with that $33 overdraft fee.

To minimize the cost of any mistakes, be sure to explore all options with your bank. You may be able to keep an additional savings account with a small sum that you never touch yet can be used to transfer funds when you do overdraw a checking account. Some banks will make limited such transfers free of charge, others for a small fee per transfer.

Another option is a line of credit with the bank. With such an option, if you overdraw your account, the bank lends you the funds from your line of credit to cover the overdraft. There will be interest charges on the loaned sum and the account often carries an annual fee but it can be great protection from other overdraft options.

The same idea can be used with a credit card. It can be attached to your account and when you overdraw your bank account the money to cover the overdraft becomes a cash advance from your credit card.

Just remember, this is still not free. Most cards have a cash-advance fee and the interest charges start the moment of the transaction. And be careful, if your interest rate is high, this can be as expensive if not more expensive than those bank charges.

Don’t Contribute to the $38.5 Billion

The advice is simple. Practice good account management – always know where you stand financially so that you can avoid costly mistakes.

Take the time to review options with your bank so as to ensure the best possible situation should a mistake occur.

You have worked hard for the cash you do have so make it a pledge not to gift your hard-earned money to the bank.

For more on overdraft protection and bank practices, visit the Federal Reserve.

 

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