Somebody explain why overdraft protection is a good thing?

Got a letter in the mail today from my bank saying something like "congratulations, we've extended your overdraft protection limit to $1000 since I'm such a good bank customer" blah blah blah, avoid the embarrassment and inconvenience of a returned item as well as the fee typically charged to you by merchants ..

Now, for one, I tend to open my bank statements and stuff in the privacy of my own home, and I can't really claim to be embarrassed by anything from my cats. Second, this so-called "benefit" comes with a $33 per item fee charged by the bank for this "benefit". I guess I have to pay not to be (virtually) embarrassed. We're talking about a bank account, not a credit card, I don't see how any direct debit charge to my bank account that gets rejected due to lack of funds could cause any embarrassment, but what the hey, I'm just a stupid consumer...

My question is, what kind of fees do typical merchants charge if their transaction gets denied due to lack of funds?

Do merchants typically charge more than $33 because I don't give a crap who charges it, a fee is a fee is a fee, would I care to pay my bank or said merchant... Doesn't sound like much a benefit to me!!!! And every item means that when a merchant tries on Day 1 to post a transaction and gets denied and then again on Day 2 to post the same item, and then on Day 3.,.. etc. etc.. you get the point. I get charged $33 x3 = $99 for this "benefit". Now does your bank call you when a charge gets rejected???? Not if they can help it...

So, I don't get it. I don't know how this benefits me, but surely it is great for the bank I think....

Oh, and in the fine print, another claimed "benefit" of this awesome plan, is that in addition to the $33 per item fee for this great idea, a $5 per day fee shall be charged to accounts that remain overdrawn with the fifteenth consecutive day of the account having a negative balance...

Let's see... $33 x 15 = $495 then $5/per day afterwards.... (assuming a merchant fee only gets posted once per day). Since it's all computerized, maybe they post 1000000xs a day... gee...

Wow, such an awesome plan... Am I missing something??

Jay

Re: Somebody explain why overdraft protection is a good thing?

Without overdraft protection your debit card would be denied if you didn't have the funds to cover a transaction, that's the theoretical cause of embarrassment.

And there isn't any merchant fee for a denied charge, it's the same as if you'd never paid them at all (because you wouldn't have).

Personally I'm not a fan of the practice either, and consider it little more than an exploitation for banks to screw you over.

Re: Somebody explain why overdraft protection is a good thing?

I thought the point of overdraft protection was to not be charged fees for bouncing a check (paper or electronic). How is paying $33 every bounce a "protection"?

Re: Somebody explain why overdraft protection is a good thing?

Urban Dictionary: screwed

Re: Somebody explain why overdraft protection is a good thing?

The point of overdraft protection is that when the merchant posts a transaction, the merchant gets paid, even if your account doesn't have sufficient funds. So what you've described here shouldn't happen. Otherwise, what's the point? If the merchant gets denied, that's the same as having no protection at all.

Most merchants have a sign stipulating their bounced check fee at the cash registers. I've seen anything from $35 to $75. I've even seen grocery stores with a wall of pictures of people who have bounced checks. That would certainly embarrass me.

Even so, your bank's overdraft protection is pretty draconian and useless. My bank has simply issued me a revolving credit account that provides funds if I overdraw my account. Though I've never used it, I'm glad it's there. The interest rate is astronomical (about 22% APR, I think), but since I never use it, it costs me nothing. And I think that paying interest for a month on the overdraft amount would be a better alternative to dealing with angry merchants and paying their fees.

Re: Somebody explain why overdraft protection is a good thing?

Everyone has their own habits, but this is another reason why I use credit cards for everything: no overdrafts to worry about.

It's also why my wife took over the finances when we got married: I wasn't as careful about overdrafts on ATM cash withdrawls and online bill payments

Re: Somebody explain why overdraft protection is a good thing?

Either you're misreading it, or that's not "overdraft protection". As noted above, with overdraft protection the merchant gets paid on Day 1, and there is no need for any further attempts. But the bank has now made you a loan; so interest (usually at a high rate) and fees start to accrue.

Is it a good deal? Of course not. Neither is carrying a balance on your credit cards, but people still do it. Banks make a fortune (or at least they used to) off of people's bad habits.

Re: Somebody explain why overdraft protection is a good thing?

A key difference is that you know damn well when you use your credit cards. With overdrafts it's entirely possible, even likely that you'll overdraft without knowing it and there's no kind of direct notice. If a few days were to go by before finding out suddenly you're royally fucked because of increment charges. Honestly I think it should be illegal.

Re: Somebody explain why overdraft protection is a good thing?

You also know damn well when you write checks and use your debit card. The problem comes when someone (a) doesn't balance their checkbook, and/or (b) succumbs to the temptation for "direct bill pay" because they think it's convenient. As long as you retain control over the inflow and outflow of your own account and pay attention, there's really no reason for an overdraft.

AFAIK, you can always decline overdraft protection.

Re: Somebody explain why overdraft protection is a good thing?

The only time I've had a problem with it was a number of years ago when it was still fairly new. I was never knowingly given the option to accept/decline it, I didn't even know of its existence. The account was with Wachovia and they eventually tried to ream me for nearly $400 for $1.50 overdraft. I refused to pay them and look what happened to Wachovia. Coincidence? I think not...

Re: Somebody explain why overdraft protection is a good thing?

When I was about 19 I worked in a conveinent store and had my checks directly deposited. I would use my debit card for everything and any amount. Unknowingly I had overdrawn my account by about $15 buying drinks and snacks at work over the course of 2 days. I got a letter in the mail on the 3rd day telling me about it. I called the bank and they informed me that I had racked up around $280 in fees for my 9 or 10 items purchased each one around $1 or $2. I never even knew I had signed up for overdraft protection, my card never stopped being accepted. Oh, and to top it off. At that time $280 was about what I made in a week.

Oh, need I mention I have found a new bank? Talk about a high interest loan. $15 for 2 days and they get $280. Do the math on that one.

Re: Somebody explain why overdraft protection is a good thing?

Now that is a scam. I trust you prevailed? Banks (and insurance companies and a lot of other organizations) make big bucks from the near-certainty that most people either won't protest or won't know how to do it effectively.

Re: Somebody explain why overdraft protection is a good thing?

It's been a while but now that I think about it I prevailed because of my own jackassery. I had applied for the account online, they were one of the first banks to allow that. Technically they were supposed to mail me all the appropriate paperwork, you mail it in or take it to your local branch and then your account is activated and you get your bank goodies, but they actually went ahead and sent everything so I just started using the account.

I was barely 20 I think... I never sent in the paperwork. I'm sure that legally they could have claimed simply using the account amounts to agreeing to the general terms, and that's fair enough... but there's no way they could claim I signed up for such an optional "benefits" program.

Re: Somebody explain why overdraft protection is a good thing?

alot of banks around here like to hold checks a couple days before clearing them so they will bounce. I've heard tons of stories of people having funds when the checks should have went thru, but the banks waited a couple days for no reason.


another bank my brother had banked at for for almost 20 years didn't bother to tell him that 3 checks were in danger of bouncing/ had bounced, they just racked up charges. 20 years of NEVER bouncing a check yet they didn't care this wierd situation came up that wasnt his fault, they just wanted the fees to charge.

Re: Somebody explain why overdraft protection is a good thing?

Sorry - that's completely not true.

A bank can't "hold a check" before clearing it. In the event a bank wants to return a check for "insufficient funds" (or "account closed") they have to return that check the business day following the day it is presented. A bank that actually did what you are suggesting would be in violation of so many regulations and consumer protection laws it wouldn't even be funny. Banks can return checks over longer periods of time for other reasons (if I remember correctly "fraudulent endorsement" can be used for up to 7 years).

Now - there is the concept of "holding" funds - but that's completely different than what you are stating.

The bottom line is that you either have funds in your account to cover whatever checks/debit transactions are presented on a given day or you don't. A bank can choose to pay a check even if funds are not available - however they have no obligation to do so.

The confusion (and ultimate unfairness) does come in the outrageous amount of NSF fees. The reality is that it costs a bank something like $3.50 (this number is a few years old) to process an NSF check. Years ago when I actually worked in a retail bank we would routinely waive these fees for good customers. I'm fully aware that banks these days aren't as forgiving there - so my suggestion is always to get out of your bank quickly if they take the hard line and find one with better customer service.

To answer Jay's original question. The original concept of overdraft protection was a line of credit that was attached to your checking account. Whenever something was presented that exceeded your available balance, the bank would advance enough on the line of credit (usually in increments of $100) to cover that check. The obvious benefit of this is that you don't bounce the check. For this service the bank charges interest on the advanced amount. Now - a lot of banks have started charging a fee (as Jay mentions) every time you dip into the line of credit. IMO this is absolutely ridiculous and a way of gauging the customer. If you're bank does this I would quickly shop for a better bank.

Re: Somebody explain why overdraft protection is a good thing?

Like Michael said upthread, as long as you're vigilant about keeping your checkbook balanced this shouldn't be a problem.

Re: Somebody explain why overdraft protection is a good thing?

A bank might not "hold" a check, but if it's not a government check, from another customer of the bank or maybe a large employer in the area, they will show as "funds unavailable" until they clear it.

My credit union went to the auto overdraft protection a few years back. Really bugged me because I used my debit card or cash for most purchases. Never balanced my account, just knew roughly what was there, and if my debit card was rejected, used cash and replenished the account. Maybe I'm a little more laid back than most, but never embarrassed me. Sloppy way of doing things, but it worked for me.

Anyhow, three minor debit purchases and a few days later I get billed $20 for each one. I complained and they reduced to fees from $60 to $30 and said it had been standard practice for years. Hardly, since I'd had the account over 20 years. Just another sneaky way for these places to stick it to the consumer.

I'm now balancing the checkbook and it hasn't happened since. Would have closed the account and moved, but I pay absolutely nothing for the accounts, no fees, no minimum balance, etc. so I stayed.

Re: Somebody explain why overdraft protection is a good thing?

Yep - funds availability polices (governed by Reg CC) are different from what Shane is describing. One common misconception though is that the check is held until it "clears". The reality is that the bank where you deposit the check never finds out if the check actually clears - there's not a notification that comes back unless the check is returned. What the bank does is uses a standard timeframe in which most bad checks come back. Hence the rules that state that a check can only be returned for insufficient funds within one day.

Re: Somebody explain why overdraft protection is a good thing?

That wouldn't make much sense from the bank's standpoint. First, they want the money as fast as they can get it. Secondly, how would they know that someone is going to write a bogus check before another deposit comes in? It seems as though it would really take a lot of effort by a shady bank to go through the effort of fooling its shady customers.

Re: Somebody explain why overdraft protection is a good thing?

As was mentioned, the reason for overdraft protection is to protect you against those you are purchasing from. Overdraft protection is put in place so the company (that you purchased from) still gets their $$ and has no idea that you had insufficent funds.

Why is this worth it? Well, if you bounce a few checks with some company, they might end up denying you future purchases. This alone is worth paying the $33 overdraft protection rather than the $3 bounced check fee.

And as was stated, yes, it's best not to bounce checks, but that's not the point of the discussion. The point is, if you DIDN'T have sufficient funds, would you like to be protected? In certain instances, I'd say yes.

Since I manage money well, I don't need that kind of protection, but for someone who does have a hard time, it might be worth it.

Actually, when I got my first job, I was paid once a month and I can tell you that toward the end of the month, it was extremely hard to manage my remaining funds. This overdraft protection would be of interest for me if I was still being paid that way because if I was short on cash and the mortgage was due, I'd rather send a check to my mortgage bank, let the overdraft protection cover the check, and pay the $33; rather than either missing the loan payment completely or having my check bounce.

and just as an FYI: My loan checks have a 16 day grace period, but there's a $55.18 increase on the payment. That's a lot more than the $33 overdraft payment. So there's a case where it would be better for me to utilize the overdraft policy and get my "insufficient" check in the mail.

Re: Somebody explain why overdraft protection is a good thing?

I may be wrong, but I think you read that wrong. The way I read it is, it's an upfront fee of $33 which covers the first 15 days. I don't think they aren't charging you $33 per day (up to 15).

Re: Somebody explain why overdraft protection is a good thing?

The bank I use provides $500.00 overdraft protection included with the free checking.

Re: Somebody explain why overdraft protection is a good thing?

I assume they will charge interest on negative balances, though.

Re: Somebody explain why overdraft protection is a good thing?

Whatever happened to the days when overdraft protection was a $5 fee and a transfer from your savings account? Nowadays, it's a credit line with a high interest rate (and sometimes still a processing fee).

Re: Somebody explain why overdraft protection is a good thing?

My overdraft protection has a $400 limit and the bank charges $17.** per item NSF'd. Not $17 per item per day, just $17 per item, period. This, in my mind, is much more reasonable than a $30+ returned check fee and my name up on a wall somewhere. I haven't overdrafted often, just a couple times in the past few years, but I sleep better knowing that the bank will hassle me less than a merchant would.

Re: Somebody explain why overdraft protection is a good thing?

$20.00 per item

Re: Somebody explain why overdraft protection is a good thing?

$500 protection, with a one time $20 fee per item. I think they allow three weeks to cover it.

It is nice to have, just in case. My annoyance was they made the change with no notice, costing me $30 when first implemented.