Beware of Bank Overdraft Protection Fees

Bank overdraft protection programs, at first glance, seem like a great safety net to have in place. Should you overdraw your checking account, an overdraft protection plan can kick in to cover the shortage. And because the bank cleared the check, you avoid insufficient funds fees that can hit $35 and the embarrassment and headaches that come with a returned check.

Banks do charge interest on the money until you repay it, but for most, the interest charged is just for a day or two until the next payday. The problem with these programs, however, are the ridiculous and often hidden fees that banks charge. We’ll come back to the fees, but first, let’s take a look at the types of overdraft protection programs banks offer.

Overdraft Protection Plans

There are several different ways banks allow you to cover overdrafts. Each comes with different advantages and disadvantages, so it’s important to understand the differences.

Courtesy overdraft-protection, or bounce coverage, plans : Many banks offer a courtesy plan to pay a check or honor an ATM transaction even if you have insufficient funds to cover the transaction. These courtesy overdraft plans do cost money. Typically, banks charge betwen $20 and $30 per transaction. In addition, there is no guarantee under these courtesy plans that the bank will cover every overdraft.

Linked savings account: Some banks will allow customers to a link a savings account to their checking account. Should the checking account be overdrawn, the bank will automatically transfer funds from the savings account to cover the check or ATM transaction. As with the courtesy bounced check plans, banks also charge a per transaction fee for linked savings account plans.

Linked credit cards: Similar to linking a savings account, you can also link a credit card to your checking account in many instances. Banks treat these transactions like a cash advance, requiring you to pay the cash advance fee and whatever cash advance interest rate the card charges.

Overdraft line of credit: With this plan, customers apply for an unsecured line of credit designed solely to cover any checking account overdrafts. These unsecured lines typically charge double-digit interest rates, but if you pay off the line quickly (on payday, for example), then the interest charges are relatively modest. This is what we use at Citibank, and in the past, it came in handy as we neared payday. That is, until Citibank quietly began charging fees for each transaction that rival the cost of a payday loan.

Overdraft Protection Fees

Several months ago, Citibank began charging a $10 transaction fee for each check or ATM charge that required the linked line of credit to cover the transaction. If, on the day before payday, we used our ATM card four times without sufficient funds in the bank, Citibank charged us a total of $40, regardless of the amount of the overdrafts. We would pay off the overdraft line the next day when we received our direct deposit, but the $40 was already taken from our accounts.

To make matters worse, Citibank doesn’t go out of its way to warn customers of this charge. It began charging the $10 fee without reasonable notice. We spent 30 minutes on the phone with a Citibank representative who claimed that Citibank had mailed out a letter notifying its customers of the new fee. The letter either never made it to us, or was part of a dense package of junk that Citbank regularly sends out.

We’ve made some adjustments to our finances to avoid using this line of credit ever again. It’s unfortunate that banking has come to this, but Citibank is not alone in charging its customers ridiculous fees.

In fact, last December the FDIC issued a scathing study of overdraft fees charged by major banks, concluding that the costs exceed that of payday loans. Here are the highlights of the study:

  • Overdraft fees have APRs ranging from 1067% to 3520%
  • Banks operating automated overdraft programs reported a median transaction of $36
  • Customers with 5 or more NSF transactions accrued 93.4% of the total NSF fees reported
  • Young adults paid the most in overdraft fees; responsible for the most NSF transactions
  • Customers in low-income areas were more likely to pay recurrent overdraft charges
  • Customers were automatically enrolled in overdraft protection programs
  • Banks process large debits first; making overdrafts more frequent
  • Banks allow ATM and debit card overdrafts, but do not alert customers in advance

One way to avoid overdrafts in the first place is with an effective budget. I’m working on several budgeting articles that will be posted soon. Until then, it is worth checking out You Need A Budget (YNAB) software, an effective, easy to use budgeting system that comes with a 60-day money back guarantee.

Published or Updated: September 26, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Keith says:

    There’s something else to BEWARE of at PNC bank. My daughter found this out the hard way. It seems that her account became overdrawn by using her ATM card. The ATM machine still let her withdraw money even though she had a negative balance in her account! Upon calling the bank she discovered that is how they have things set up. She didn’t know this and it wasn’t discussed when she opened her account. Her previous bank would not allow money to be withdrawn from the ATM if there was a negative balance. Each time she withdrew money she was charged the overdaft fee.

  2. Rob Rubin says:

    To me, overdraft transfer fees are particularly onerous because the bank is simply transferring money from one account to another (in the case when someone designates a savings account as their sweep account) or making money on accrued interest (in the case of an overdraft line of credit or when someone designates a credit card). Why pay $10 for each item? It’s a ripoff.

    Other fees to watch out for include Debit Card PIN Purchase Fees and Non-Bank ATM Surcharges.

    If anyone is interested, we have an free, unbiased comparison tool that estimates the fees you can expect to pay based on how you bank (no personal information required).

    FindABetterBank

    Rob

  3. ARJIS says:

    Maybe you owe the bank money for one of your kids accounts that was overdraft. If they pull that money out of your account, and it causes overdrafts because you weren’t notified they were going to take it out, get yourself an attorney. I did. The overdrafts were refunded to my account after my attorney wrote a nice letter notifying them to contact me on how they were going to resolve the issue. It didn’t cost me anything to call and explain the situation, and ask for assistance.

  4. Yeah, you def. have to watch out sometimes but I’m still a huge fan of them. I guess it’s good for those who are really good at watching their money (or addicted like i am in checking all accounts every single day), because we do slip up at times no matter how we budget…and if you DO check your accounts daily, you can fix it up quicker ;)

  5. Jennifer @ Money Saver 101 says:

    We use to have this problem as well. when we would overdraw, it was a $10.00 fee each time. The most irritating thing about it was that even if it was a mere $3, we’d have a $10 overdraft fee.

    It happens a lot if you use a debit card. If you use it for ATM, debit and credit purchases, your balance isn’t always what you think it is unless you keep excellent records. Don’t rely on your online bank statement or ATM balance inquiry to tell you what you have. Keep a bank book and keep track of all your expenditures on that one card. Credit purchases don’t show up for a few days on your statements.

  6. michael says:

    Learn how the world works and stop complaining. All of these things are explained in that small brochure that came with your credit card. They send out updates all the time, but you do have to read them.

    One would think that after one month with $40 in overdraft fees you would catch on and stop overdrafting. You are taking other peopels money and should be penalized so you will stop doing it. If the banks can’t cover their costs and make a profit on checking accounts, because they are not allowed to charge those who abuse their accounts by overdrafting, they will start charging everyone a checking account service fee every month like they use to. Let the irresponsible pay the freight, not the rest of us who don’t act like it’s a right to spend money we don’t have. What the hell, have another $35 latte.

    • erika says:

      if banks would simply post transactions in the order they happen and show an accurate reflection of the available balance, almost all overdrafts would be avoided. bank set their practices so its more likely that customers will incur more fees. using money that’s not theirs??? thats what the banks do by charging these outrageous fees!!! the way of the world is fraud and people like you support it. what the hell, be another corporate banking lackey.

  7. Shiva Badruswamy says:

    Hello there:

    I complained to the OCC (Office of comptroller and currency) about the high APRs associated with the overdraft protection fees of my Chase Checking account. We establish a credit line in the first place to ward off gaps in receipt and payment of funds. This is called working capital management. This is why we pay an interest rate in the first place. Why then charge a fee to access this credit? Also, I’d like to know if banks charge fees when withdrawing lines established through SBA guaranteed loans. I’d like to know if this is illegal. Perhaps I’ll write to the SBA and see if such fees are permitted on SBA guaranteed loans. Chase credited $20 back as a courtesy. What a scam!!!

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