Confession time: I used to be a personal banker. But before I could sit down and help people with their finances one-on-one, I first had to pay my dues as a bank teller. While I didn’t mind that at all, there was one aspect of the job that I deplored: calling people to tell them that their accounts went negative.
Can you imagine calling someone and telling them that: (a) they don’t have money in their account and (b) they’re going to get charged for not having money in their account once their pending transactions hit? It was painful. These were people that I’d gotten to know in my community and who started to trust me as someone who could help them with their finances. But when their accounts were negative, there was nothing I could do. Even a fee reversal could only happen on the first incident.
Needless to say, the overdraft fee issue has been a pretty hot button issue for me ever since. I’d left banking long before the Great Recession, but was relieved to read about the new regulations being put in place to stop the madness. Now, unfortunately, it looks like these fees are back on the rise. So now I want to take the opportunity to tell you – just like I used to tell my customers – exactly how you can avoid the long and scary spiral of overdraft fees.
Why Overdraft Fees Are on the Rise
First, let’s talk about why overdraft fees are so important to banks. In short, they’re one of the bigger factors in how banks make revenue. How big? Check out these statistics shown in The Wall Street Journal:
“Overdraft fees make up the bulk of checking-account fee revenue, said Jefferson Harralson, a banking analyst at Keefe, Bruyette & Woods Inc. in Atlanta. Financial institutions generated $31.9 billion in overdraft revenue in 2013, compared with $32 billion in 2012, said Moebs. It had fallen to a recent low of $31.6 billion in 2011, from a peak of $37.1 billion in 2009. The fees can reach as much as $50 per transaction, according to the Moebs survey.”
As you can see, these fees are not only one of the driving forces in revenue for banks, but the revenues from the fees are also on the decline – thanks to regulations put in place after The Great Recession. What’s worse, as highlighted in the report mentioned in The Wall Street Journal, banks are also losing money due to declining interest rates, which are the other very important piece of a bank’s earning puzzle. So if a bank is losing money on interest rates (which are dictated by the Federal Reserve’s prime rate) and fees (which they have slightly more control over), what do you think they’ll do to make up for loss in revenue? Raise the fees.
And that’s what’s happening. Banks are now increasing the amounts they charge for individual overdraft fees and they’re actively seeking out new customers likely to end up overdrafting. As quoted in The Wall Street Journal,
“To help make up for lost revenue, experts say banks are raising overdraft fees and pitching related services, hoping to increase the pool of customers who can incur such fees.”
Now, banks are a business and one can hardly blame a business for trying to earn enough money to be sustainable. Banks do have pretty steep costs to provide their mostly free services after all. But marketing to people who are likely to overdraft – in other words those who tend to have precarious financial situations? That tactic is questionable, at best.
So how can you make sure you’re not getting marketed for something that could lead to financial instability? Avoid getting charged for overdraft fees at all costs. Here’s how:
What You Can Do to Avoid Costly Overdraft Fees
There are a few things you can do to make sure you don’t get charged with overdraft fees – both in how you set up your accounts and how you maintain them:
When it comes to overdraft protection, you may want to opt out.
The easiest way to avoid getting charged an overdraft fee is to opt out of overdraft protection. That way your bank won’t even approve of any charges that would take your account to the red. This, however, is a case-by-case basis. Some people actually prefer to let some charges take their accounts negative if it means the difference between making an important bill on time (such as a mortgage or a utility bill) or not. If you’re living paycheck to paycheck and prefer to know your bills will go through, even if it will cost you more in the end, then you may want to opt in. Keep in mind that these services vary based on the account type:
“The 2010 Fed regulation required customers to give banks permission to allow overdrafts for debit-card and ATM transactions. Those who don’t opt in aren’t able to use their debit cards or make withdrawals if they don’t have the available funds. Overdraft fees linked to checks and some online bill paying don’t require a customer to give their approval.”
Consider other ways to buffer your account.
If your finances are precarious enough for you to want some sort of buffer for charges that could take you negative, there are other ways you can do it. One option is to link your checking account to your savings account. Then, if a charge takes you negative, the money will be taken from your savings and you won’t be charged overdraft fees. The same can be done with a line of credit or a credit card, although the danger of this plunging you into debt is something to be vary wary of.
Understand the difference between “account balance” and “available balance”.
If you don’t keep a checkbook register and mainly rely on online banking to see how much money you have, then you could be at a high risk for overdraft fees if you opt in. The biggest cause of confusion? “Account balance” and “available balance”.
“Account balance” is how much money you have in your bank account, not taking into mind credits or debits that could change that balance by the end of the day.
“Available balance” is how much money you have in your bank account, minus pending transactions. In other words, your available balance is how much money you actually have.
Some people try to play the dangerous game of beating the pending charges, thinking they can do a balancing act knowing everything doesn’t always go through that day. Don’t play this game. If a charge is going to take you over your available balance, you can pretty much assume you’re going to go negative and get hit with a charge. (Unless you opt out, in which case your transaction will be denied.) Treat your bank account like cash and not credit and you can avoid the pain of denied transactions or costly overdraft fees.
There are few issues that incite anger faster than bank fees. Being on both sides of that coin myself, I completely understand why. Luckily, you can make sure you aren’t put into a financially damaging position even if you’re living paycheck to paycheck. And if you have any questions about what you can do to better protect yourself, ask your local bank teller – just make sure you don’t make any decisions to opt in or out of products unless you feel 100% comfortable with the decision.
Image Credit: wajakemek | rashdanothman