Overdraft protection gives people a license to ignore their cash management
Overdraft protection is usually sold to people when their open their accounts as the way to ensure that bounced cheques don’t ruin their credit ratings. When you try to spend money you don’t have in your account, the bank covers the withdrawal – be it a cheque, debit or cash withdrawal.
Don’t confuse the kind of overdraft protection you “buy”, for which you sign an agreement, with what some banks call “bounce protection” or “courtesy overdraft protection” which they offer to save you from the embarrassment or hassle of a returned cheques (which, I admit, can be very expensive).
According to www.bankrate.com, the average courtesy overdraft fee is $29, but fees can be substantially higher. And since the fee is levied regardless of the amount you go into overdraft for, it can be astronomical when you calculate it as a percentage of the “loan.” One woman wrote me to say that she was appalled when her statement came in and she had over $160 in bounce fees.
I’m all for the traditional overdraft protection for which you sign an agreement so you know what you’ll pay in interest (it is much higher than you might think). It beats the pants of NSF fees and the bruise on your credit report.
What I’m not for is the idea that overdraft protection gives people a license to ignore their cash management. They can spend whatever they want, whenever they want, because overdraft protection is there to catch them like a safety net.
While some of you might think, as I do, that overdraft protection is a short-term affair – most overdrafts are said to last only about 5 days or less – I’ve met oodles of people who practically live in overdraft.
The banks don’t mind one little bit when you go into overdraft, since overdraft interest rates are well above regular lending rates – one bank I checked charges 21% interest on your outstanding overdraft -- and going into overdraft automatically triggers a monthly fee. If, in fact, overdraft is just for the odd slip as the marketing material says, then why do some banks offer the option of going $5,000 or more into overdraft? That’s NOT a little slip.
The answer to running into overdraft is not overdraft protection, it is to better manage the cash in your account so you don’t try to spend money you don’t have. Hmmm. What a concept.
How do you do that?
Get yourself a notebook. When you put money in your account, add it to your balance. When you spend money from your account (be it a cheques, bill payment, a debit card transaction, or a cash withdrawal) you debit that amount from your balance. Keep your eye on the balance.
If you think that sounds like too much work, you’re a dope. You’d work at least this hard to find where gas is selling for a penny less, or where tuna is two for $1.39, or where wings are all-you-can-eat for $3.99. Staying out of overdraft is one of the best deals going.