Overdraft Protection Service: Does It Really Protect You?

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A recent publication by the Financial Brand indicates that 43 percent of consumers say they have no bank fees or that they are completely unaware of the bank fees they do have. One of these fees may be overdraft protection.

In 2009, the Federal Reserve Board of Governors ruled that in order for a financial institution to charge you overdraft fees on ATM and onetime debit card transactions, you must opt in to receive such protection. The ruling also specified information you must agree to, including the financial institution’s fees and your choices regarding the service.

Now that you have the option to opt in, should you? Here is a bit of information you should consider when deciding whether to opt in or opt out of overdraft protection.

Purpose

Overdraft protection was designed to protect you from bouncing a check. If you wrote a check that your balance couldn’t cover, the bank would cover the check. This saved you the embarrassment of bouncing a check and also money in the form of returned check fees. The Federalist Society published data from a 2006 survey that found that 86 percent of banks had at least one type of formal overdraft program. That same survey found that on average, 6 percent of banks’ operating revenue was derived from overdraft fees.

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Cost

If you opt for overdraft protection today, the cost is around $35 per item, depending on your bank’s policies and your location. The bank will allow you a certain amount of overdraft purchases in a given day. For instance, your bank may allow you to make up to four purchases that include overdraft fees. This will cost you $140.

Is it outdated?
During the times when paying a bill involved getting out your checkbook, writing a check to a company, and waiting for it to clear, overdraft protection helped in the event of miscalculations. These days, with banking transactions being relatively instant and your balance updating within minutes, in many cases, keeping track of your spending involves simply viewing an online statement. This begs the question as to whether overdraft services are really necessary.

In a recent article, John M. Floyd, chairman and CEO of Floyd and Associates, writes that during difficult economic times, “many (consumers) rely on their financial institution’s overdraft program to help them to make ends meet.” There are many reports of customers using overdraft programs in the same manner as they would use a payday loan. In these cases, the APR on the “loans” amounts to around 300 percent, according to estimates published by CBS News.

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Bottom line

Overdraft services do have some benefits. In a true emergency situation, these services may be advantageous. Those who still write checks may also benefit from overdraft services. However, overdraft protection comes at a cost — one that only you can decide the worth of. If you are someone who does not keep a thorough track of your finances or you are consistently near a zero balance, you may want to avoid the high overdraft fees. It’s also wise to read and reread all of the terms and conditions attached to your bank’s overdraft protection service program. Know what you are getting yourself into before you sign or click.

You also have options when it comes to overdraft protection. Many banks offer protection in the form of linking your checking account to your savings or another type of account. In the event of an overdraft, the bank will simply transfer the funds from one account into another to cover your purchase. The cost of this type of overdraft protection runs around $10 per occasion – significantly less than if the bank were to cover the purchase. Your bank may also offer an overdraft line of credit, which is a certain amount of funds you may borrow. The interest on the overdraft loan is around 15 percent, depending on your bank’s policies.

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