Thanks for voting!The New York Times ran an interesting piece last week, headlined “Banks Apply Pressure to Keep Fees Rolling In.” The jist? Banks are trying to convince customers that overdraft protection (and the eye-popping fees that typically accompany it) is a necessary safety net.
The marketing blitz comes as a result of new federal regulations, which state that banks must get consumers to agree, or “opt in,” to a service covering purchases or ATM withdrawals on a debit card when there is not enough money in their account. According to one source in this article, banks generated an estimated $20 billion from overdraft fees on debit purchases and ATM transactions in 2009. That’s some hefty revenue.
So, marketers are now probing consumer pain points in hopes that people will opt to keep the overdraft protection, regardless of fees. To wit: One bank referenced in the article sent special letters warning that “If you don’t contact us, your everyday debit card transactions that overdraw your account will not be authorized after August 15, 2010 — even in an emergency.”
Oh, my.
What kind of emergency, you ask? Well, the article cites another example wherein a customer went to his bank branch to turn off his overdraft protection:
Beware, his banker cautioned. If [he] used the card to buy gas, the station might place a hold on his account and he might not be able to fill up at all, even if he had enough money in the bank to cover a full tank.
Um, okay. $2.70/gallon + a $35 overdraft surcharge. How’s that for an inadvertent gas tax?
Yikes.
So, what does this mean for you? Read letters from your bank carefully—and with a big hunk of salt. Sure, there’s something to be said for having money available in an emergency, but think about your options: Many banks also offer less costly overdraft protection in the form of a line of credit in which consumers sign up to cover insufficient funds in their checking account; other options may include automatically pulling money out of a savings account or a credit card. And some banks offer checking accounts with no overdraft fees at all.
As always, share with us your thoughts on the issue. What would you do to cover yourself in a cash-less emergency?
Tags: checking fees, Overdraft
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Well, I do have cash in a money market checking account to cover emergencies… But I just remembered that should I need it, I have a $500 “credit limit” on my ING Orange account. Which is funny because anytime I’ve ever overdrawn (a few bucks here and there, but knowing when I did so), I had money in savings to immediately transfer.
So no, credit cards have not been a consideration for me for emergencies (I don’t have any anymore), but even so, I’ve been working to build up a side EF, so the credit line extended from ING hasn’t even been in the thought process. Good backup though! :o)
I think overdraft protection is important for an emergency or even just those times when we are human and make a small math error or forget about a small purchase we made that hasn’t posted yet to our account. Although I think charging a flat overdraft fee of $35 dollars is outrageous. If you overdraft by $1, they will charge you $35. That’s a 3500% penalty. The fee should be in proportion to the amount of the overdraft. That’s why a small line of credit or a link to a savings account or credit card makes total sense. Many of the banks snake their way around those options though. I bank at Chase/Washington Mutual, and they still charge you $10 to cover an overdraft in your checking account with funds from a linked savings account. That is ridiculous. They get their money right away, why do they need to charge you $10. On the other hand you have BECU credit union here in washington, and you can keep all your money in your savings account so you can get interest, and keep no money in your checking account, and any draw on the checking account will just pull from the savings account and there are no fees or penalties. That is a great service. I used to be a firm believer in a free market system, but the corporate greed and lack of accountability, responsibility, ethics, and morals proves that the market can’t police itself.
I try to rely only on emergency savings when the cash runs low. But barring that, I will turn to a credit card in a real jam. Only with the promise to myself of paying off the balance in full come the next billing cycle — I absolutely will do anything to avoid credit card debt (having paid off a bunch in the past few years)!
I personally think that overdraft protection shouldn’t be needed at all. I try to keep a large amount in my checking just so I don’t even get close. With interest rates the way they are, are you really making more money by keeping it in a savings account and then overdrafting? Your interest is going to the fees! Just keep a couple thousand in checking at all times, the rest in savings, and you’ll be fine.
My bank does not charge me if my overdraft protection kicks in (only interest after 15 days) but they do charge me if I bounce a check and it is embarrassing . So I think it is better to use overdraft. I have previously arranged for overdraft protection. If your bank charges an overdraft fee maybe you should look for another bank.
I got one of those letters from my credit union recently after turning down the option on their banking site. They try to sell you on the idea that $32 isn’t much to pay to avoid the embarrassment of having a transaction declined. I’d prefer the embarrassment to knowing I’d have to pay at least two times what an item was being offered for. A line of credit, I think, is a more fair model, as someone else mentioned earlier.
Some banks will let you link a credit card to your checking account to use as overdraft protection. You will be charged somewhere between nothing and $5 in this case per transaction, and usually the cash advance fee is waived. Another option is to use pre-approved overdraft coverage that costs nothing other than the interest. Even if you overdraft by $100 and pay interest for a few days, it’s a lot cheaper than $32.
As other posters have pointed out, linking your savings account to your checking account is yet another option.
I think that the main point is that we should prepare for the worst and hope for the best so that the banks have the amount of money that they earn on overdraft/overlimit fees minimized..