Overdrafts can be a very costly way to transact business. Of course most of us never really intend to overdraft our checking accounts, it usually happens unexpectedly just before a payday or as a result of an unexpected expense. Financial Institutions treat overdrafts as a very short term loan and assign a fee for the transaction. Many fees range between $30- 35 for each overdraft. Once one transaction creates an overdraft, each subsequent transaction creates another and another until the balance in your checking account is restored. It is not uncommon to see overdrafts come in multiples.
In an effort to help families overcome the overdraft fee monster, Federal legislation enacted in 2011 allows people to "Opt Out" of overdrafts. This can help to stop the avalanche before it starts. When you opt out of overdrafts, your debit card will be declined if it creates an overdraft for you. If you are at your local grocery purchasing your needed items, at the checkout you will find that your transaction will not be processed. At that point, you can put some items back and pay using your available funds. It stops the snowball of overdraft fees and keeps you in the black!
One thing to consider is that your transaction may be declined even if you have the funds in your checking account if there are holds placed on your account by virtue of a gas, hotel, restaurant or some other purchase that holds an amount to cover your transaction.
Where opting out doesn't prevent a fee is when you have electronic bill payments or checks being submitted for payment. The financial institutions may charge you a fee even if you chose to opt out. In 2011, financial institutions earned an estimated $38.5 billion in fees associated with overdraft fees according to a Pew Study "Hidden Risks: the Case for Safe and Transparent Checking Accounts".
Overdrafts can be the reason that people leave a financial institution and are prevented from opening new accounts because of a history of negative balances left at a former financial institution. Fortunately, you can take action to protect yourself and keep your good name intact:
1. Know your balance: keep good records of transactions and verify that transactions are correct and unduplicated by reviewing transactions through online banking or reviewing your monthly statement. See details in your "Bank On It" lesson.
2. Know what Checksystems reports on you: get your free annual Checksystems report by requesting it at www.consumerdebit.com.
3. Linking your savings with your checking may prevent unnecessary fees, but be sure to repay your savings as soon as possible to keep your emergency protections in place.
4. Know your financial institution's fee schedule so that you can know how to avoid unnecessary penalty fees.
To learn more about the Opt Out Rule check out this article:
Opt Out Rule - Federal Reserve Board
Supplement Your Savings from Smart About Money:
From Center for Responsible Lending
Payday loans lead many borrowers into cycles of debt, according to a new white paper by the Consumer Financial Protection Bureau. Among the study's findings: most payday loan borrowers make less than $30,000 annually, and the average borrower is in debt for nearly 200 days a year.
Did you know?
- More than 1/2 of payday loan customers remain in debt for 199 day out of the year (more than six months) while the average repayment period for a payday loan is approximately 2 weeks.
- The average amount borrowed on a payday loan is $350 but the total fees paid over a 12 month period for payday loans is $458.
- 1/2 of all payday loan customers earn $22,476 or less.
- 25% of all payday loan customers report some form of public assistance or other benefits.
- Virginia offers a minimum of two payday cycles for loan repayment and a madated cooling-off period after loan repayment.
One of the actions people in the Mayor’s Action Challenge need to complete as part of demonstrating financial fitness is to create a valid will. http://www.doyourownwill.com/ has a simple will that is fairly easily without requiring a login etc. Recognize that it may not adequately address complex situations, for those you should see a lawyer.
Remember, have your will notarized and signed in front of two witnesses. Your bank often can provide that service.
Meyera E. Oberndorf Central Library is host to FREE CAREER COACHING. Mondays by appointment. If you want to accelerate your income potential or land your dream job!
The Career Coach on Mondays is available to the public. Appointments are taken two weeks ahead, and it typically fill up pretty quickly. Customers can register via phone at 385-0150 or in person at Central Library.
From Federal Reserve
What do you need to know about courtesy overdraft-protection, or bounce coverage, plans?
Avoid using these plans as short-term loans--they are costly forms of credit.
If you overdraw your account, get money back into your account as soon as possible. Remember that you need to put enough money back into your account to cover both the amount of your overdraft and any bank fees.
Even if you have one of these plans, there is no guarantee that your bank will cover your checks, ATM withdrawals, and debit card and other electronic transactions that overdraw your account.
Good account management is the lowest-cost way to protect your hard-earned money. If you need overdraft protection every now and then, ask your bank about the choices and services that are right for you.
Banks, savings and loans, and credit unions may provide other ways of covering overdrafts that may be less expensive. Ask your bank about these options before making your choice. You may be able to:
Link your checking account to a savings account you have with the bank. If you overdraw your checking account, the bank can transfer funds from your savings account to your checking account. Ask your bank about transfer fees.
Set up an overdraft line of credit with the bank. You need to apply for a "line of credit" just as you would apply for a regular loan. If you overdraw your account, the bank will lend you the funds by using your line of credit to cover the overdraft. You will pay interest on this loan, and there may be an annual fee. But the overall costs may be less than the costs for courtesy overdraft-protection plans.
Link your account to a credit card you have with the bank. If you link your account to a credit card, any overdraft amount becomes a cash advance on your credit card. You will probably be charged a cash-advance fee, and interest charges on the advance will start immediately. The cost of this option depends on the interest rate on your credit card and how long you take to pay back the advance.
The choice is yours. Consider these ways to cover your overdrafts:
|Ways to cover your overdrafts||Example of possible cost for each overdraft*|
|Good account management||$0|
|Link to savings account||$5 transfer fee|
|Overdraft line of credit||$15 annual fee + 12% APR|
|Link to cash advance on credit card||$3 cash-advance fee + 18% APR|
|Courtesy overdraft-protection plan||$20 to $30|
|Bounced check||$40 to $60 ($20 to $30 bank fee +|
$20 to $30 merchant fee)