The True Cost of Overdraft Protection

Having overdraft protection for your account may be convenient, but it can have considerable consequences on your pocket.

Consider this:the median overdraft fee charged in most retail banks is already $34. That means you might be paying this large fee every time you transact beyond your available funds,and you can rack up a pretty big fee right away.

The Consumer Financial Protection Bureau reports that overdraft and NSF fees constitute the biggest single cost for individuals who own a checking account. In fact, banks earn as much as $17 billion annually from these charges alone!

Sadly, the people who are most affected by such fees are those who are in financial need. Researchconducted by Pew found thatthe “heavy over drafters” – people who pay more than $100 a year in overdraft fees – are earning below theU.S. median income of $54,000.

About 1 in 4 of heavy over drafters lose the equivalent of a week’s worth of wages just to pay fees alone.

These individuals are likely people who live paycheck to paycheck, and have little option but to incur overdraft fees when unforeseencosts need to be met before the next salary arrives.

The True Cost of Overdraft Protection

Overdraft fees happen when you make payments even though your account balance is not enough to pay for that transaction.

People who have not opted into an overdraft protection program are only charged with a nonsufficient funds fee and get declined.

However, those who opt for an overdraft program will have the bank cover the transaction. That means you can use your account to complete a transaction even if you don’t have that total amount yet in your account. Banks then charge an overdraft fee for the service.

While it may sound beneficial, based on research, overdraft fees tend to be detrimental to one’s finances. Banks can actually charge feesrepeatedly from the same transaction until you’ve paid in total the shouldered cost and the fees!

It can be an expensive credit tool for some people. The thing is, credits have at least set limits on fees, or an option for a reasonable period for repayments. With overdraft fees, this is not the case. Banks will charge again and again until you end up literally overdrawn.

Top Ways to Avoid Overdraft Fees

If you want to be free from overdraft charges, here are the top tips to do so:

1. Opt out of the program

Check to see if you are enrolled in an overdraft protection program, and opt out of it right away. The next time you make a transaction without enough funds, you will be charged with a nonsufficient fee. That’s still a cheaper penalty than overdrafts, which will be charged for every succeeding transaction.

Remember: opting in is optional. Banks just make it sound as an ideal setup. The only legal requirement for them is a one-time ask if you want to opt-in, and they take advantage of this by subtly including the question in ATM transactions.

This is probably why as many as 52% account holders cannot even remember that they opted in an overdraft program.

• Get a bank with no overdrafts

Big banks generally have overdraft programs. It will not change anytime soon, unless there will be a federal policy regulating the charges. The good news is, some online-only institutions are no longer implementing the fee.

To learn which banks do not charge overdraft fees, or those that have the minimal charges, check out https://overdraftapps.com.

• Use a prepaid debit card instead

A prepaid debit card isaccepted in stores and ATMs, just like a regular debit card. The only difference is that it is not linked to a checking account. That means it will not have the usual overdraft services.

If you use a prepaid debit card with insufficient funds, your transaction will simply be denied and charged with the one-time penalty.

Wrap Up

Overdraft fees can wreak havoc on your finances if not examined carefully. You wouldn’t want to use your hard-earned money just to pay bank charges, right? That’s why it’s best to explore other options, or try as much as possible to spend onlywhat’s in your account.