Say you have no money in the bank, a month’s worth of bills due, and a gas tank to fill. To make it through the next 2 weeks, you need to borrow $100.
So, do you…
- Get cash out of the ATM, overdrafting your checking account?
- Continue to charge your high-APR rewards credit card all month, running up debt at the highest APR allowed by law?
- Get a payday loan?
There is a clear best option, and you can use a calculator like this one to figure out the most beneficial choice given your personal situation. Here are the results for our hypothetical question:
|Loan Total||BofA ATM Overdraft||29.99% Credit Card Interest||Payday Loan Charge|
Overdraft fees: they’re evil
The most attention-grabbing fact about overdraft fees is that until August 15, 2010, your bank did not need your consent to opt you in to “overdraft protection” programs. This means that if you didn’t realize that your account is empty, you would be charged $35 every time you use your debit card until you realize there’s a problem.
The Fed eventually concluded that most Americans are not interested in this kind of “protection”, and now require that banks obtain your consent before they provide it to you. Predictably, this has meant that banks are now constantly bugging customers via email to “opt in.” Over the few months that have elapsed since the new rules went into effect, I’ve ignored a whole stack of letters from Chase asking me to consent to their expensive idea of “protection.”
Despite the actions of the Fed, banks such as the Midwest’s TCF Financial continue to claim that their customers do, in fact, want this overdraft protection. Whether deceptive marketing, insufficient education, or simple pressure tactics are at fault, TCF has managed to get over half of their existing customer base, and 80% of new customers, to opt in to overdraft programs. And with several other banks also boasting opt in rates of over 50%, this is clearly no anomaly.
Why Are 80% of TCF Financial’s New Customers Opting In, while BofA Eliminates Them Altogether?
Why 80% of TCF’s new customers are choosing overdraft protection is a tough question to answer. My guess is that a lot of the responsibility can be assigned to deceptive marketing, as well as the fact that the bank’s huge presence on college campuses means its targeting a market of students who don’t know any better. And how does TCF account for this? Their basic line is that “nobody wants to look bad at the cash register.” It’s worth taking into account that this issue is a big deal for them, since overdraft fees make up all of their profits.
At the same time, Bank of America declared several months ago that overdraft fees had angered too many of their customers for them to continue imposing them. In B of A’s last earnings call, the bank reported that 10 million customers left them last year, mostly because they were frustrated with overdraft charges. In the same report, they declared that 10% of their customer base was paying 70% of those charges. You can find more detailed information on this decision on slide 9 of the bank’s earnings presentation.
Debit Cards: The Real Evil?
It pains me a bit to write this, but the moral of the story is—if you need money, you actually do better for yourself piling debt onto your credit card than getting an overdraft fee by taking too much out of your checking account. In terms of finding the right credit card to pile that debt onto, make sure you get a low APR or a balance transfer credit card instead of a premium rewards card, since these generally have significantly higher APRs.
However you make the loan happen, it is important to avoid falling into a pattern of ending the month with $100 less than you need. Ultimately, people falling into patterns like this one are what make payday loans such a lucrative business.