Common Misconceptions: Overdraft Fees are a Part of Life

Common Misconceptions: Overdraft Fees are a Part of Life

When I was a teller many moons ago, I had a customer who adamantly believed the bank wanted to rip him off. He thought that overdraft fees were simply a part of life and that there wasn't a single thing he could do to avoid them. Many other people believe the same; banks are evil and run by greedy trolls. That is simply not true (okay, maybe the greedy troll part could be accurate...). In any case, banks are not looking to make all of their money on your overdrafts, and there are many legitimate ways to make your own personal overdrafting ancient history. Let's count the ways.

Dispelling Myths

First, let's look at the idea that overdraft fees are the bank's big money-making scheme. Banks charge on average about $30 per first-time overdraft. The high end of fees for those who continuously overdraft is about $50 per overdraft. Yes, this seems like a lot of money considering you may have simply transposed a few numbers in your checkbook. But in the bank's eyes, this is just enough to cover what it costs them to process the overdraft and discuss your options with you when you call in.

In all actuality, instead of trying to make money off of your mistake, they are trying to discourage you from ever overdrafting your account again. Responsible customers make good customers; when you handle your money well, you'll have more of it to invest in bank purchases, like in loans or investments.

Where the Cash is Really Produced

This brings us to the true money cow of banks: loans. Yes, the cash the bank wants comes from loaning you money, not from your overdraft fees. When you think about it, all that interest that you pay on your home loan can really line their pockets to the tune of tens of thousands of dollars, rather than at a rate of $30 every few months.

The Secrets to Avoiding Overdraft Fees

This is where we really get into banking secrets, particularly the ways you can avoid overdraft fees. By talking to a banker and educating yourself, you can make those pesky $30 fees disappear.

First, let's look at the banker's secrets. Bankers or customer service representatives (as they're often called today) can set you up with a few options, both of which are a form of overdraft protection. One idea is to link your savings account to your checking account. If you spend too much from checking, a set amount of money is automatically pulled from your checking to your savings. Often, this option is free. Another option is to link a credit card to your checking; when funds are too low to cover a purchase, your credit card will advance some cash. This usually costs something, but it is much lower than $30 a pop.

The other major way to avoid overdraft fees is to educate yourself on budgeting, particularly if overdraft fees occur quite often. At this point, there is usually something that can be done to better budget, whether it be drop a few unnecessary items from the budget or watch your spending more closely. Some banks offer a service that can help you better budget.

So that's it: all the little secrets about overdraft fees, the bank's cash cow, and how you can avoid overdrafting in the future. Check back with us for more banking tips, tricks and secrets!

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Leigh's picture

Leigh wrote:

Wed, 03/28/2012 - 20:50 Comment #: 1

Another trick instead of using the "protection" of savings to checking transfers is to put $500 or $1000 extra in your checking account and forget about it (if that's possible). Then you are your own overdraft protection :)

That's what I do - I have a dividend rewards checking account, so I keep the amount of money in my checking account to get the highest interest rate as savings and that provides a very nice buffer!

Christa Palm's picture

Christa Palm wrote:

Thu, 03/29/2012 - 16:15 Comment #: 2

Leigh, great tip! Especially when you have rewards checking :-)

Miss T @ Prairie Eco-Thrifter's picture

Miss T @ Prairie Eco-Thrifter wrote:

Thu, 03/29/2012 - 18:43 Comment #: 3

It always amazes me how people think they have no options and that they just have to eat the lumps. There is always something that can be done. Great article.

Christa Palm's picture

Christa Palm wrote:

Thu, 03/29/2012 - 22:09 Comment #: 4

Miss T, I was always amazed that this particular customer wasn't even open to sitting down with a banker to look into some options. He was dead-set in the belief that the bank wanted to suck him dry. There will always be a way to combat any problem!