Downside of overdraft protection?

[Gumby]

Quote:

Originally Posted by Katsmeow My son (who is a foolish 18 year old) got hit with huge overdraft fees that spiraled out of control out of a very small initial overdraft. The first overdraft they charged I think a $10 fee and transferred the money from savings. Bear in mind that he didn't realize he had overdrawn. They send a notice in the mail but it has taken up to 3 weeks to arrive. In the meantime he didn't know the transfer had been made from savings or that the fee had been charged so he quickly got in a situation of repeated overdraws of very small amounts. He didn't have much in savings so that was quickly emptied and then the fees increased to a higher amount. Long story short he ended up with several hundred dollars in overdraft fees. Yes, he was an idiot. He would call the bank and use their automated service to see what the balance was in the account. He didn't realize there were transactions that hadn't cleared so he used the debit card and went negative. Yes, I told him to keep a written record of withdrawals but he figured he knew more than I did and that transactions should instantly clear so the bank feedback was 100% accurate. I'm sure that most people with overdraft protection who are here are not so idiotic. That said, I was shocked by how high the fees spiraled up to from an initial overdraft that was very small with the fees just eating away the savings account balance that he had thought was covering overdrafts. In his case, not only does he not have overdraft protection he made it where his debit card is solely an ATM card. Bear in mind that the reason for the new law is the fact that banks loved signing people up for this without getting their consent (often with no way to opt out) and then charging fees. The banks frankly prefer that people overdraw rather than simply decline the transaction.

A story very similar to your son's

Checking account overdraft fees: Bank robbery 2010 style - Connecticut Post

[smjsl]

Thanks everyone for responses. I see how overdraft would be a problem with debit card usage. I think the main disadvantage highlighted by many responses occurs when
(a) without the protection, you *would* have seen that something did not go through (e.g. with debit card), but protection "hides" it from you, and
(b) account is used often, or one does not pay attention frequently enough that they don't see the fee hit the account until it's too late.

I think these are good points to keep in mind. In my particular case, the account I am thinking of does not have above two problems. It does not have debit card and is only used for periodic payment of ~3 bills / month. I also check for any weird activity on every monthly statement. So, hopefully, I would see the OD fee on the monthly statement. Finally, with direct deposit going into this account, even if I missed the OD fee hit on a statement, next direct deposit should cover incoming bills.

Given this, I think OD protection would be beneficial in my case since without it I think I would get hit with 2 fees (one for each side) for every online payment that is overdrawn and I would not know about it until I get the next statement either way. With OD protection, my bills would get paid on time and presumably I would get hit only by 1 side with fees instead of 2... Sounds about right?