Beginning last year, all banks in the United States was mandated to give up a huge source of their revenue, Overdraft (OD) fees. Overdraft fees are usually incurred by irresponsible use of a plastic card that most Americans carry in their wallet: a debit card. This card gives the user such convenient access to their bank account that a fair amount of consumers lose track of how much they spend. As a result, banks made millions annually from OD fees alone. You can probably figure out why every bank offers tempting incentives for consumers to open a “free” account with them.
In 2010, Obama passed a law to protect consumers by forcing banks to offer various debit card overdraft coverage options. This is not the same as OD protection; debit card OD coverage options are basically how you want your bank to handle your account when about to surpass the balance on your debit card. To remain compliant, banks must now allow account owners to opt-out for OD coverage. Opting out for OD coverage usually means that in the occasion where you don’t have sufficient funds in your account when you may a payment with your card, banks will decline your transaction—NOTE: different banks may have different terminology, so make sure you fully understand what the option means before selecting it. For those that easily lose track of what their expenditures, this option could potentially save a them a ton of fees.
However, some banks may not even offer the option of OD coverage. OD coverage usually means that banks will allow you to complete your transaction despite even when there is insufficient funds in your checking account at the time of the purchase—again, different banks may have different terminology. For those financial institutions that do offer the option, they would ideally prefer for consumers to opt-in in order to earn OD revenue. Many banks subliminally encourage consumers to opt-in by offering free OD coverage ranging from $5 to $20. That means if your bank offers free OD coverage up to $15.00, your checking account balance can go as low as -$14.99 without getting an OD fee. The catch is if you leave your account in the negative balance long enough, most banks will collect a continuous overdraft fee from you.
Making a selection, which option is good for me?
Debit card overdraft coverage preferences vary from person to person. You should make your selection by scaling the benefits versus the risk factors. If you are one of those people who frequently incurs OD fees, opting out would likely be a good choice since it will help you to avoid all those OD fees. However, if you are one of those who are proficient at managing your account and rarely deal with OD fees, then opting in may not be that bad of a choice. Some benefits of opting in for OD coverage would be: saving you the embarrassment of getting your card declined, allowing you to get gas and other necessities in emergency situations, and etc.
Be a smart consumer: know the system and avoid the fees.
The best way to avoid fees is to know how and why they are charged. Negligence can often be blamed for most of these fees. That’s why it is important for you to read the disclosures and the pricing booklets enclosed in your new account package; any questions can be answered by your banker. Here are a few things you should be aware of:
1. Opting out for overdraft coverage doesn’t guarantee that your account balance won’t go negative because this selection only applies to debit card purchases. That means writing a check, authorizing a payment using your account & routing numbers, and having preauthorized subscription or recurring payments can still overdraw your account. Verify this with your bank’s policy.
2. Running your debit card as “credit” is a good way to keep your PIN safe; usually you would only need to show your ID, sign a receipt or e-signature pad, or punch in your zip code. For those that do this often, you should be really careful because paying with your debit card this way can actually overdraw your account even when you have opted out for debit card OD coverage.
Let’s say that your account has exactly $20.00 available, and you‘re at a gas station trying to pump $70.00 worth of gas to fill up your tank. Most, if not all, of the times, you will be able to pump all the way up to $70. Why? Because gas stations usually charge your debit card for about a dollar (exact amount may varies); then a few days later, that $1.00 charge will drop and the whole $70.00 will clear through your account, leaving you a balance of negative $50.00. Another example would be usage at a restaurant, they will only charge you for the amount of the meal with tax. Then a few days later, you will see a total amount with tip included clearing through your account. It gets tricky when you run your debit card as “credit”, so make sure you pay close attention to how much is actually being cleared through your account. Some banks will not charge you an overdraft fee if your account was overdrawn this way because technically it’s not your fault since you’ve opted out; but some banks will charge you, so it’s your job to find out!
3. Fees that your banker may not have explained in detail or mention to you:
a. Continuous overdraft fee – is charged when your account balance is negative for a number of consecutive days. This fee can re-occur until your balance is positive again.
b. Inactivity fee – aka dormant fee, is charged when your account has no activity for a long period of time. This usually ranges from 6 months to a few years. Banks can get very creative when it comes to creating fees, so your best bet is to ask your banker to see if there are any other fees related to inactivity or failure to notify a change of address.
c. Overdraft protection transfer fee – is charged when your bank automatically transfers money from your overdraft protection source to your checking account to prevent it from going negative. Usually overdraft protection is a credit card, a line of credit, or a saving account.
d. Stop payment fee –yes, placing a stop payment on a check or on an electronic payment will cost you money. In fact, some banks will charge you almost as much as an overdraft fee.
Have a safety net for a peace of mind.
With anything in life, it is always good to have a plan B, something to fall back on when things don’t go as planned. Overdrafting your account is like an accident, consumers rarely purposely overdraw their accounts. It happens to the best of us, but what makes a difference is what you have prepared for when it happens. Overdraft protection is definitely a good thing to have: having a savings account is usually the best overdraft protection you have simply because it’s your own money. Nobody is making interest profit from you using your own money. For those of us who live paycheck by paycheck and have nothing saved, our next best choice would be a credit card or line of credit. Obviously banks can make money off you from the collecting interest of your credit card balance and overdraft protection transfer fee, but at least the amount is lower than one or more overdraft fees. The benefit of credit cards is that if you pay off the balance within the grace period, you don’t have to pay for any interest!
