When you accidentally spend more than what you have, it’s nice to know that overdraft protection has your back. But with overdraft fees the highest they’ve been since the financial crisis in 2008, overdraft “protection” might not be the safeguard it’s cracked up to be.
If you find yourself battling unexpected overdrafts or are relying on overdraft protection to stretch your cash, then it’s time to understand the full consequences of opting in to the program. Here are some things you need to know.
1. Overdraft Fees Are on the Rise
A recent Bankrate study estimates 2019’s average bank overdraft fee at almost $34. That’s up a whopping 40% from the average $24 overdraft fee in 2000. With the total figure paid by American consumers in overdraft fees hitting $34.3 billion in 2017, the most since 2009, U.S. banks and credit unions are certainly benefiting from consumers who need a little extra cash.
2. Banks Need Permission to Overdraft Your Account
You may not realize it, but your bank or credit union is not allowed to overdraft your account without your permission. The Overdraft Protection Act of 2013 requires financial institutions give consumers a notice explaining overdraft policies, and account holders must opt in to allow their bank to overdraft their accounts.
That means your bank or credit union can only pay overdraft amounts, and subsequently charge you the relevant fee, for debit card transactions or ATM withdrawals if you have previously opted in to allow this option. If you haven’t opted in and there isn’t enough money in your account to cover the payment or withdrawal, then your transaction will simply be denied.
Prior to this rule, accounts were automatically enrolled in overdraft protection and consumers had to opt out if they didn’t want it. While the regulation was a positive step toward safeguarding consumers, half of those people whose accounts went into overdraft didn’t remember signing an opt-in agreement, according to the Pew Charitable Trusts, which has evaluated overdraft fees and their effects since 2013.
3. Opting Out of Overdraft Fees Doesn’t Always Work
Even if you do opt out of allowing overdrafts to your account, opt-in agreements only apply to one-time transactions, such as ATM withdrawals or debit card usage. Recurring payments for automatic withdrawal or paper checks may still incur insufficient-fund or bounce fees even if you’ve opted out of overdraft protection.
Of course, this doesn’t apply to all financial institutions, so contact your bank or credit union to find the exact policy for automatic electronic payments and overdrafts caused by checks.
4. Repeat Overdraft Fees Add Up Quickly
It can be easy to overspend your account balance without realizing it. And, unless you set up alerts through your bank, you may not be notified your account is overdrawn. This means you could end up being charged with repeat overdraft fees for every transaction that occurs after you’ve dipped below your account balance.
Recurring overdraft fees can add up quickly, especially for lower income families who have to plan carefully to stay within their budgets. According to the Bureau of Consumer Financial Protection, only 8% of account holders incur almost 75% of all overdraft fees. This highlights just how hard it can be to get out of the cycle of overdrafting for people with consistently low account balances.
5. Banks Charge Hefty Overdraft Fees on Small Transactions
The majority of debit card overdraft fees are on transactions of $24 or less, and most of those transactions are paid back within three days. The painful truth is consumers who overdraft their accounts are often paying more in bank fees than the amount of money that is advanced when overdraft protection kicks in.
For example, say you accidentally overdraft $24 from your bank. If your bank charges you a typical overdraft fee of $34 on the transaction, and you deposit that money back into your account just three days later, then you would have paid a shocking 17,000+% APR on the money borrowed!
6. Banks and Credit Unions Benefit From Overdrafts
According to the Pew Charitable Trusts, banks that charge overdraft fees on ATM withdrawals and debit card transactions bring in 400% more overdraft revenue than banks that do not. So, your bank might be financially motivated to charge you overdraft fees when least expected.
How to Avoid Overdraft Fees
Monitor your account balance
Knowing your account balance can help you budget accordingly before your account is overdrawn. Many banking and budgeting apps can provide quick glances or snapshots of your daily balance and what’s safe to spend.
Most banks will also let you opt in to receive text notifications or email alerts if your balance slips below a certain amount.
Opt out of overdrafts
As mentioned above, you can opt out of overdraft protection from your bank, but it’s essential to understand what this means. Find out if opting out includes all transactions, and if not, what would result in additional fees.
Understand Your Options
You don’t have to rely on bank overdraft protection to meet your financial needs. Many alternatives exist that can provide quick access to cash between paychecks, such as payday loans.1,2
Payday loans can be a good solution for short-term financial problems—and often at a lower cost than multiple overdraft fees.
- Approval depends upon meeting legal, regulatory, and underwriting requirements. All product and service options subject to change without notice. Actual loan amounts vary. Online transactions not available in all states. Additional documentation and verification may be required. If your loan is approved and originated by 8:00 p.m. ET on a business day, your funds will typically become available on the next business day following approval and origination, after all required documents are received and underwriting complete.
- Payday Loans (also referred to as Payday Advances, Cash Advances or Deferred Deposit Transactions/Loans) subject to applicable lender’s terms and conditions. Payday Loans are typically for two-to four-week terms (up to six months in IL). Some borrowers, however, use Payday Loans for several months, which can be expensive. Payday Loans, Payday Advances, Cash Advances, Deferred Deposit Transactions/Loans and high-interest loans should be used for short-term financial needs only and not as a long-term financial solution. Customers with credit difficulties should seek credit counseling before entering into any loan transaction. See the Check `n Go State Center for specific information and requirements. Check `n Go products are not referred to as loans in the state of Nebraska but are referred to as payday loans, payday advances, or cash advances.