Maybe your bank account is in such good shape that bouncing a check is not even a remote possibility, but what about your children or your grandchildren? They may not be sitting so pretty.
Overdrafts are worthy of discussion.“Over the past 15 years, overdraft transitioned from an occasional courtesy to a practice that extracts billions in fees from consumers each year. Banks' overdraft revenue doubled between 2004 to 2008, making a sizable dent in consumers' bank accounts,” says Rachel Anderson, director, the Center for Responsible Lending, a nonprofit research and policy organization.
According to CRL, in 2011, overdraft fees cost consumers $16.7 billion. “With so many American families now living paycheck to paycheck, overdraft fees make tight financial times even worse. They are the leading reason that consumers lose their bank account,” she says.
The Consumer Financial Protection Bureau recently released a report raising a red flag about consumers' ability to anticipate and avoid overdraft costs on their checking accounts. The report found a range of practices from financial institutions when it comes to the costs and risks of opting in to overdraft coverage.
In theory, overdraft protection sounds like a good idea. If you overspend, the bank will “cover” you. But that comes with a price, typically about $35 per incident. “CRL found that the median overdraft charge is $35 for a $20 overdraft,” says Anderson.
Unfair overdraft fees and practices are one of the bank consumer's biggest problems, says Edmund Mierzwinski, consumer program director with U.S. PIRG, a consumer advocate group. Although in 2010 regulators began to require an opt-in before people were enrolled in “standard overdraft protect,” abuses still occur, says Mierzwinski.
Here are a few ways to keep overdraft fees at bay.
Just say no
Don't say yes or opt-in for overdraft protection when asked, or opt-out if you're already enrolled, says Mierzwinski. “Be wary: bank personnel relentlessly push the product to new customers and customers who call with questions. Just say no. Without 'standard' overdraft protection, you cannot 'bounce' a debit card or ATM card transaction. Is it worth paying a $35 fee for a $3 latte?” he asks.
Take advantage of technology
See what your bank offers that can help you keep track of your money. For example, “You can set up alerts by text message or email to be notified of important activities taking place within your account. You can receive notification of your balances, or when a direct deposit has arrived,” says Timothy Stokes, senior specialist corporate communications for PNC Financial Services Group. Customers can track their debit and credit card spending so they are able to stay within their budget, know when their r account is getting low, and also monitor online, phone or international purchases.
Build a buffer
Leave a cushion beyond the amount needed monthly in your account for bills as a safety net. “Be aware of all your bills and when your money comes in. Consider adjusting bill pay dates to ensure you don't have too many due at one time so you don't get financially hit all at once, which can result with you being low on funds and susceptible to overdraft” says Leslie Tayne of Tayne Law Group, which specializes in financial issues.
There's safety in numbers
Link your checking account to your savings account or credit card to avoid unintended overdrafts, says Tom Feltner, director of financial services with the Consumer Federation of America.
You might also see if your bank offers a free “sweep” feature, whereby money will be automatically moved from your savings account to your checking account to cover any overdrafts, says Edgar Dworsky, founder and editor of ConsumerWorld.org.
Get the facts
Ask your bank when deposits are credited to your account and when transactions are subtracted. “Deposits should be credited as soon as possible so as to avoid unnecessary overdraft fees,” says Anderson. She also advises steering clear of institutions that subtract debits from highest to lowest – another practice that can increase consumer overdrafts. Do find out too, whether the institution charges a sustained fee (a daily penalty charge for each day an account remains under zero). “A sustained fee makes it more difficult to bring your account back to a positive balance,” she adds.
Inquire whether the bank charges overdraft fees on debit card or ATM transactions. Anderson says eight of the nation's largest banks do not charge overdraft fees on debit card or ATM transactions or both. “This is a good thing, since debit card and ATM transactions are often the trigger for overdraft fees. Yet, a bank's declining a transaction costs the consumer and the bank nothing,” she points out.
The bottom line? Watch your balance and choose your bank carefully.
Says Anderson, “Not all banks try to sink customers with abusive overdraft fees. Moreover, banks have different policies regarding how overdrafts are ordered charged, grace periods, and policies regarding sustained fees.”