Banks Encourage Checking Account Overdrafts

Saying that banks want you to overdraft your checking account is like saying that credit card companies don’t want you to pay off your balances. It makes sense, but it’s not terribly obvious. Mainly because we think that banks would like to reward responsible behavior. The more truthful assessment, however, is that banks would much prefer to punish you for financial mistakes. They make so much more money that way.

The Washington Post’s Michelle Singletary (hat tip Miki at MAPping Company Success) reports on the lucrative nature of overdraft protection on checking accounts:

Many banks and credit unions automatically enroll customers for overdraft protection programs when they open a checking account, according to the center. When an overdraft occurs, the financial institution will automatically advance the funds. But for the privilege of a short-term loan to cover the shortfall, the customer is charged $34 on average, according to center data. The fee kicks in even if the overdraft is for a few dollars.

One of the advantages of overdraft protection, however, is that — depending on how your bank does things — the fee is often only charged once. Other banks just charge a high rate of interest until you are back in the black. On the other hand, there are often annual fees that come with overdraft protection. This is because overdraft protection is not considered a safeguard; it’s considered a loan. These days, almost no bank lets you use a connected savings account as protection, allowing an instant transfer to cover the deduction.

If overdrafts are common for you, it might be worth it to pay for overdraft protection, though. On accounts that aren’t protected, banks charge between $38 and $45 per transaction that is over the amount in your account. That means the fees can really add up fast, especially since most banks will keep electronically approving overdraft transactions up to $100 or more. That means that if you make five $10 purchases without funds, and the bank charges $45 per transaction, you pay $225 in fees on top of your $50 in purchases. Revenue increases indeed.

Obviously, it is better to just keep track of your purchases and what you have in your account. With a little effort, you can ensure that overdrafts are not a problem at all.

image source: Paul Vlaar via Wikimedia Commons