It used to be that people would automatically be enrolled and to an overdraft protection checking account. At first, not everyone knows what overdraft protection means exactly. You think of the word protection, and you think that it is a good thing. For the most part, it is a tool for the banks to increase their revenue. There are two ways an overdraft can happen:
If you write a check for an amount higher than the current balance in your checking account, the check to clear, but your account will go into the negative and you will incur an overdraft fee. You could again write a check for an amount higher than the current balance your checking account, and it will clear. If you have overdraft protection set up with a savings account that is linked with your checking account, it will transfer the negative amount from your savings account to your checking account to bring it into the black.
In both scenarios, you are charged a non-sufficient funds fee or an overdraft fee. Before there was regulation set upon the banks by the government, people were automatically signed up for an overdraft protection account. There have been a large number of people who have gone into deep debt because of non sufficient funds fees.
Say for instance, you had $100 in your checking account, and you were just charged $105 for a bill you forgot about. Now your account is five dollars in the negative. Because he did not know at this charge has occurred, you go through your daily routine and purchase some items. You purchase a two dollar cup of coffee from Starbucks, and then you decide to go to the local grocery store to purchase a four dollar snack. Later on at lunch, you go to a sandwich shop and buy a six dollar sandwich. Then, later in the evening on your way home, you go to the gas station and spend $20 on gas. Now, so far today you have spent $137. From the first charge, where your checking account was billed $105, your account was in the negative for five dollars and charged a non sufficient funds fee. While your account was in the negative, there were five additional transactions that take you further into the negative. Each time your card is charged, you will incur a non sufficient funds fee regardless of how small or how large the transaction was. That means, that if your bank charges $20 per each non sufficient funds fee, that means that your bank is going to charge you $120 for going $37 into the negative. Just to let you know, that is a 324% fee.
Now let’s say that you had your savings account linked with your checking account. Your checking account only had $20, but your savings account at $2000. If you spend $30 with your debit card, the transaction will go through, and $10 will be deducted from your savings account and transferred to your checking to compensate for the difference. Even though this process is conducted by a computer and involves almost no effort on the bank to transfer that money, they will charge you a fee. Some banks, such as Wells Fargo, will charge you $10 for having to automatically transfer money from your savings to your checking to compensate for any transactions that take your checking account into the negative. Honestly, that is a ripoff.
Overdraft protection is something that you should not need or want. If you aren’t in need of overdraft protection, that means you need to improve your financial management. Making simple mistakes with overdraft protection can cost you a lot of unnecessary fees. There is an article that goes over some information at the CNN Money Blog.