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Should You Be Able to Overdraft Your Checking?

Senator Chris Dodd, chair of the Senate Banking Committee has introduced legislation which would require banks to make overdrafts opt-in. I think this is something banks should do, legislation or no legislation. Unfortunately, it’s very profitable to banks to offer overdraft “protection.”

According to the Washington Post, these fees totaled $38.5 billion last year.

Checking Account Overdraft Protection – Fees

Right now, if you open a checking account with $250 and then spend $300, most banks will give you “overdraft protection.” It might be more accurate to call this “overdraft-getting-screwed.” Instead of denying your card for insufficient funds, the bank fronts you the money and charges a 1-time fee for doing so.

For example, instead of denying the debits on Lynnae’s account when a check (from another bank) she deposited bounced and she was short of cash, Chase put through each of her 8 transactions, each with a separate fee. Ouch. Lynnae was able to get the situation straightened out, but hers wasn’t just a miscalculation, it was the error on another bank’s part.

Banks often present this as a protection or a favor. In dire circumstances, it might be, but 99% of the time, it’s something the consumer doesn’t actually want. Most of us would far rather be denied a transaction than pay a $25 fee for a $1.20 coffee. My dignity (and coffee) in that situation isn’t worth $25.

Savings Account as Overdraft Protection – No Fee

When I was 18, I got my initial savings and checking accounts with a local bank (I’d had a juvenile account before). They offered a useful overdraft protection. I remember signing up to overdraft my checking account on my savings.

I never had an overdraft, but it was an incredibly practical and customer-friendly setup.

ING Direct has a moderately sane approach to the subject, setting up a line of credit for checking accounts. If you overdraft up to $500, you’re covered. And if you pay it back from one of your other ING accounts the same day, you shouldn’t accrue any interest. I’d prefer the option to link it with one of my savings accounts as backup (does anyone know if they’ve added this feature?), but since money can be instantly transferred once I have access to a computer, it’s pretty sane. Much better than fees.

Can You Opt Out of Overdraft Protection and Fees?

Yes. Many (but not all) banks and credit unions will allow you to call and opt-out. The proposed bill would require you to opt-in when you set up the account, meaning that you’ll get a chance to check out the fees and decide whether or not it’s worth it.

Opting out still won’t save you if you’re bouncing checks. Because checks don’t normally get the same immediate verification that debit cards, the bank won’t be able to stop people from accepting them.

The way things should work in a normal, sane world is that when you run out of money in your checking account, you’re done, you can’t use your card or withdraw money. If you have savings with a bank, it makes sense to have the option of putting that in place as a backup (though you run the risk of getting hit with the 6 savings account withdrawals per month rule). And in a sane world, you shouldn’t even attempt to overdraw–but things happen, like the bank check that bounced in Lynnae’s account (who can you trust to write good checks, if not a bank?).

But we don’t live in a sane world. We live in a world where convenience and easy credit often override personal responsibility and sound financial decision-making. And we live in a world where we can overdraft a dozen times and never be told, because it’s financially better for the banks to get fees off of us than stop us.

How are Banks Responding?

Banks have already responded to this threat by announcing plans of their own.

Starting October 19th, Bank of America will allow customers to opt-out of overdrafts entirely (I don’t know if they couldn’t before, or if the process has been improved). In June of 2010, they’ll impose a limit on the number of times people who didn’t opt-out can overdraw with a debit card (so you’ll actually know you’re out of money, eventually). New customers will have overdraft protection as an opt-in option.

Chase says they plan to allow consumers to opt-out. Also, they’ll change their controversial way of applying payments to an account. Suppose you’d spent $35, $10, $20, and $124 (in that order) using a debit card but only had $125 in your checking. Their old method of ringing it up would debit the $124 first, leaving you with three overdrafts and three fees. They’ll change to debiting in the order of the debits, which would mean that you’d only be hit with one overdraft and one overdraft fee.

The NY Times article linked above has more details.

Do You Support the Legislation?

So, do you support making overdrafts a required opt-in rather than an opt-out? Do you think banks would be willing to do it without legislation? Bank of America and Chase have made strides, but this comes as a response to the move for legislation. After all, banks made over $38 billion in overdraft fees last year.

And do you have any overdraft stories you’d like to share–were you able to resolve it or did you end up paying big?

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The Financial Blogger September 23, 2009 at 6:07 am

An easy way to avoid those fees is to use a line of credit as a main bank account. Actually, your line of credit can show a positive balance.

If you ever “go under”, you won’t have overdraft fees since it is normal to go negative on a line of credit 😉
.-= The Financial Blogger´s last blog ..Top Ten Canadian Dividend Stocks =-.

Miranda September 23, 2009 at 8:52 am

Many banks won’t even allow you to use a savings account as a back up. I know. I’ve asked. And the fees charged for overdraft protection, plus the interest, can be ridiculous. But I do think it is nice that Congress is forcing banks to rethink their policies. I’m not sure how I feel about an actual law, but at least banks know that they need to make a change.

Jesse September 23, 2009 at 12:09 pm

How bout people just start paying more attention to their accounts and stop bouncing checks or spending more than they have just cos its easy…can the Govt pass legislation on that? haha 😉
.-= Jesse´s last blog ..Modest Meals: Homemade Fajitas =-.

Mrs. Accountability September 23, 2009 at 8:43 pm

I guess you just have to ask, because there doesn’t seem to be any hard and fast rule for any bank or credit union. Wells Fargo first lowered my $5000 line of credit down to $2000, and then took it away. It was my overdraft protection account, so I asked if I could attach to the savings, and they allowed that. They charge $10 to overdraft. I have a personal account with a credit union that gave me a $5000 line of credit; no overdraft fees. I am not sure about my husband’s business accounts at a different credit union, but I learned recently they that charge a fee for cash deposits! He doesn’t get paid in cash very often, and so far never over $300 in cash. It’s not like he’s bringing in a ton of coins or anything.
.-= Mrs. Accountability´s last blog ..$500 in Prescriptions – Payment Denied =-.

PK September 25, 2009 at 9:46 am

FYI, my ING overdraft credit line is and has always been $1000, though I’ve never used it.

chuba February 28, 2010 at 2:17 am

Thank God!!!! Thank God!!! Thank God!!!
Congress is taking a closer look into this matter. I have been affected so many times on the overdraft protection charges. The dubious thing about overdraft protection is that the system is setup to cause you overdraft fees regardless of how you spend your money. I have a purchase that was place on hold for about two weeks, immidiatly my account went over, all the charges on hold posted and cost me close to $500 in fees.

I am so sick of it.

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