Downside of overdraft protection?

[smjsl]

Lately, almost every financial institution I deal with is sending me you-have-to-explicitly-sign-up-for-overdraft letters. I usually discard these, but when my "main" one asked me the same thing, it sounded like there is no downside. It's free (with them at least). They claim without overdraft protection, both they and the other institution would charge fees in case of insufficient balance; and with this free protection, I would only get charged the same fee by them, but the other institution would get the funds just fine.

It sounds like we did not used to explicitly sign up for this and were enrolled in this service automatically, but now, due to some new law, they have to ask us about this...

So, the question is, is there any downside to this I might be missing?

 

[Alan]

Lately, almost every financial institution I deal with is sending me you-have-to-explicitly-sign-up-for-overdraft letters. I usually discard these, but when my "main" one asked me the same thing, it sounded like there is no downside. It's free (with them at least). They claim without overdraft protection, both they and the other institution would charge fees in case of insufficient balance; and with this free protection, I would only get charged the same fee by them, but the other institution would get the funds just fine.

It sounds like we did not used to explicitly sign up for this and were enrolled in this service automatically, but now, due to some new law, they have to ask us about this...

So, the question is, is there any downside to this I might be missing?

With overdraft protection you automatically get charged if you overdraw - right?

They say :

and with this free protection, I would only get charged the same fee by them, but the other institution would get the funds just fine.

So, if you use your debit card and unintentionally overdraw, rather than have your debit card be rejected it is accepted and you get hit with a fee. If you use your debit card again you will be hit with another fee so if you are out shopping and made several purchases you will be hit with several fees without realizing it?

With my bank I have a savings account as well as a checking account and an arrangement that if a check or debit card transaction is going to cause an overdraft then funds are moved over to cover this - no overdraft fee.

 

[smjsl]

Thanks Alan, interesting point about multiple overdrafts resulting in multiple fees. So, it sounds like for automated transactions or written out checks it's better to have the overdraft, since you don't know until later anyways that those payments will bounce. But for those where you can see a problem right away (debit card) and if they are used often enough, it might be best of avoid this.

Of course, your arrangement with the bank sounds the best.

 

[Fireup2020]

I don't believe USAA charges an OD fee if you have OD protection....

 

[REWahoo]

I don't believe USAA charges an OD fee if you have OD protection....

I have OD protection at USAA, any OD is covered by a cash advance from my USAA Mastercard. Although there is no OD fee associated with the transaction, CC cash advances do accrue interest charges from day one, so some costs are incurred.

 

[Alan]

Thanks Alan, interesting point about multiple overdrafts resulting in multiple fees. So, it sounds like for automated transactions or written out checks it's better to have the overdraft, since you don't know until later anyways that those payments will bounce. But for those where you can see a problem right away (debit card) and if they are used often enough, it might be best of avoid this.

Of course, your arrangement with the bank sounds the best.

One of the things I think the financial reform bill may fix is the practice of processing transactions as they happen rather than a method that maximizes the fees to the bank. Suppose in a single day you start with a balance of $100 and then make 5 transactions of $5, $10, $15, $20 and $150, with the $150 charge coming last. Instead of taking them in the order they are received the banks deduct them sorted on size. So, instead of paying a single overdraft fee you actually pay 5 overdraft fees.

I don't know if they still do the practice of putting deposits after withdrawals but before internet banking I got burned with fees one day when I opened my statement and found that although my pay had been paid in on the last day of the month as always, I had several withdrawals so that even though the daily balance never went below zero I was hit with overdraft fees. When I complained I was told that on a daily basis deposits are always added last so on that day I had gone negative, but they did refund the fees and I was very careful never to let that happen again.

 

[Alan]

This is a good program to watch on bank fees with debit cards, starting at minute 30.

The Card Game | FRONTLINE | PBS Video

 

[smjsl]

I don't know if they still do the practice of putting deposits after withdrawals but before internet banking I got burned with fees one day when I opened my statement and found that although my pay had been paid in on the last day of the month as always, I had several withdrawals so that even though the daily balance never went below zero I was hit with overdraft fees. When I complained I was told that on a daily basis deposits are always added last so on that day I had gone negative, but they did refund the fees and I was very careful never to let that happen again.

That's interesting. I periodically transfer money from an account to a low-balance account and then ACH it away or wire out the same day. I don't recall any fees for this and have done this in quite a few financial institutions (e.g. when a CD matures, I would transfer it to an ~$0 account which was probably setup as a requirement to open the CD, and then transfer the money out).

 

[mickeyd]

I have never bounced a check or overdrawn my account in any fashion so OD "protection" is not a big deal to me, but USAA bank has always had me on their OD plan. I currently have my savings account as OD protect and that is backed up by my MC! Kinda like belt/suspenders for someone who wears pants with an elastic waistband, huh?

 

[Alan]

That's interesting. I periodically transfer money from an account to a low-balance account and then ACH it away or wire out the same day. I don't recall any fees for this and have done this in quite a few financial institutions (e.g. when a CD matures, I would transfer it to an ~$0 account which was probably setup as a requirement to open the CD, and then transfer the money out).

As I said in my post, that incident happened to me a long while back. These days with on-line banking you can see that the debits and credits are inter-mingled on any given day so I certainly don't have a problem with that now. When I transfer money from a savings account to my checking account (same bank) the transfer is instant so I know when I then pay the bill that there are sufficient funds.

 

[Bimmerbill]

I set up USAA to OD via my MasterCard as well.
I've never intentionally overdrawn my account, but once the bank processed a $1.23 check as $123, cleaning out my checking account and causing issues. They fixed it, and returned the OD fees.

 

[kramer]

I called up one of my banks that put me on overdraft protection by default to get rid of it.

I travel and the last thing I want is for my ATM card account to not be empty-able. Something that has happened before in certain places is the paseo del millionario, they take your cards and empty out your accounts while you (or someone you care about) is held prisoner. I also lowered the max cash daily withdrawal limit on this card from $1000 to $500.

A much more common practice is that your card gets scanned (via a device on the ATM machine) and they film the numbers you input for your code via a hidden camera. Then they start making daily max withdrawals without your knowledge.

I also don't want someone to run up big debit card transactions (using the debit card as a credit card, signature only) with the ability to use overdrawn funds.

Kramer

 

[kcowan]

We have a daily limit on our debit cards of $150 for use in a merchant and $1000 if used at an ATM. This has worked well for us so far. And we live in Mexico. I check the bank account regularly.

 

[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.

 

[audreyh1]

Ever since the scary temporary financial collapse of 2008, I keep an extra month's worth of cash in my bank checking account so that I don't need to worry about delayed transfer of funds between institutions, etc., due to some type of market disruption.

That acts as my overdraft protection.

Audrey

 

[fritz]

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.

This is exactly why you now have to agree (opt in) to this overdraft service. You should be told up front that this very expensive protection is available and that you may "opt in" to have it. Financial institutions added this service w/o explicitly stating you were getting it (usually buried in the fine print handed to you when you open an account). It's a hard lesson to learn when for some unforeseen scenario you go negative in your account. Financial instutions automatically approved your oversight and added the fee. A candy bar purchase for a dollar could get a $30.00 overdraft. Every purchase in the negative gets that same fee. It's a lucrative business area for financial institutions. You wouldn't believe how many people got caught in this trap,and paid through the nose. Not my personal experience - my wife works at a Credit Union. The recent activity (contact by your financial institution) now is because they "must" get your (opt in) permission to continue to hit you with these excessive fees.

 

[Koolau]

This is exactly why you now have to agree (opt in) to this overdraft service. You should be told up front that this very expensive protection is available and that you may "opt in" to have it. Financial institutions added this service w/o explicitly stating you were getting it (usually buried in the fine print handed to you when you open an account). It's a hard lesson to learn when for some unforeseen scenario you go negative in your account. Financial instutions automatically approved your oversight and added the fee. A candy bar purchase for a dollar could get a $30.00 overdraft. Every purchase in the negative gets that same fee. It's a lucrative business area for financial institutions. You wouldn't believe how many people got caught in this trap,and paid through the nose. Not my personal experience - my wife works at a Credit Union. The recent activity (contact by your financial institution) now is because they "must" get your (opt in) permission to continue to hit you with these excessive fees.

DW took her small business checking account (on the order of $25K on average) from a bank over a ridiculous fee that they would not wave (obviously, not an OD!) They called 6 months later to see why she no longer banked with them after almost 50 years (or one of the bank incarnations before them). That was a fun phone conversation. Banks have joined the growing list of businesses for which folks have no loyalty. For a $3 fee, the bank lost potentially thousands. DW found a bank who didn't charge that fee. A rigid, spiteful, straight-razor totin' woman!

 

[kcowan]

... For a $3 fee, the bank lost potentially thousands. DW found a bank who didn't charge that fee. A rigid, spiteful, straight-razor totin' woman!

We need more such consumers. It will eventully force the banks to be accountable.

 

[free4now]

It seems to me that overdraft protection doesn't actually buy you much. Yes your payments may go through but you pay two or three figures for what was probably a hiccup that you didn't cause. That seems to me like a recipe for frustration.

I'd rather just have the payments fail and arrange to have them resubmitted. When I lost a credit card I had several automatic payments fail. They just contacted me to get a new account number and all was well. At least that way I feel like I have control and at the end of the day I don't end up paying any more than I have to, so I'm not as grumpy.

 

[Danmar]

OD fees and NSF charges are the most profitable bank products in the US. Americans pay so much in NSF fees (presumably many can't be bothered with a cheque book?) that free chequing became a lost leader for NSF and OD fees. Not the case in Canada. Whatever you do- don't get OP protection or pay NSF fees. It's a real rip off.

 

[Gumby]

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?