Combatting Overdrafts, One Charge At A Time

Overdraft Charges Galore

Your checking account is low, showing a balance of just $81. Payday is tomorrow, but the rent is due today, so you decide to write a post-dated $700 check and take it to your rental office before its closes for the day.

Meanwhile, you spend $40 at the gas station, $19 on groceries, and you take $10 out of the ATM, Checking Account leaving just $12 in your account. With a direct deposit in the amount of $1500 expected the following day, you are confident that all of your bills will be covered, at least for now.

Tomorrow arrives and you go to work looking forward to the coming weekend. While taking a break, you decide to log on to check your bank balance, expecting to confirm that your pay was deposited.

Unfortunately, you’ve just had one of the worst shocks of your life: all four transactions were posted to your account yesterday, starting with the biggest chunk of money, your rent, followed by the three smaller transactions. Suddenly, it dawns on you that you’ve been hit with a $33 fee, monies which you planned to use to cover other household expenses.

The Worst Isn’t Over

If you think that the $33 overdraft fee is the worst of this person’s trouble, think again. Many banks will charge a customer for each overdraft, meaning the unnamed consumer would be hit with four charges, bringing his overdraft expenses to $132.

Most consumers are not aware that banks withdraw money from accounts by the largest amount first when debits come in on the same day. In this case, the consumer thought that he was okay, finding out later that the rental office was able to deposit his check before the bank closed. That moved triggered an immediate overdraft, followed by three small debits which incurred their own fees.

Overdraft Protection?

To help customers avoid overdraft charges, most banks also offer overdraft protection whereby the bank will cover the needed funds, depositing money in increments of $100 to cover overdrafts. When that happens a fee is charged for the overdraft (usually $5) and interest is charged to a credit card tied in with that account. If the credit card isn’t paid off in full, then additional interest charges will accrue.

Some banks force credit protection on their customers, though many still offer it as a “convenience” option. Each time the bank must charge your credit card to provide the funds needed to pay for overdrafts means you’ll pay a fee. Though the cost of not having overdraft protection is much higher than the account that offers this option, fees can add up and credit card bills must be paid.

Consumer protection in this area is very weak with banks allowed to basically do what they want to do unimpeded. Some financial institutions will limit their overdraft charges to 5-7 charges per day, but you could still be hit with big fees.

In worst case scenarios the bank could tell creditors that you have overdrawn your checking account. That usually doesn’t happen unless you refuse to make good on what you owe them, but it is something you’ll want to keep in mind the next time you write a check when the monies have yet to be deposited into your account.