Many people feel strongly that bank fees have gotten out of control over the past few years. And, there are hard facts to back up this claim. Take overdraft fees, for example. Currently, banks bring in over $30 billion per year in the United States alone in overdraft fees. Some consider this highly unfair, but it is all perfectly legal.
You see, the vast majority of bank customers who sign up for a checking account are automatically enrolled in overdraft protection programs. These programs are opt-out, which is marketing speak for "if you do not say you do not want to be enrolled, you are automatically enrolled." And, many banks give preferential treatment to people who enroll in their overdraft protection programs.
Besides, what could be so bad about enrolling in overdraft protection, right? After all, aren't the programs designed to protect consumers from bouncing checks or getting rejected at merchants when trying to run a debit card for a purchase? Well, yes. But, the programs are actually set up to heavily favor the banks in making a lot of money in fees.
How Overdraft Protection Works
Overdraft protection programs work by covering any outstanding charge made by an individual, even if their checking account balance would not normally cover the charge due to non-sufficient funds (NSF).
These programs "protect" the customer by not bouncing checks or rejecting debit or credit charges. But, they actually are set up to make huge amounts of money in fees. Most banks now charge $30 to $35 per overdraft. And, since they allow debit card transactions to go through even when the account has a low or negative balance, a person could easily rack up $100 or more in fees in a single day.
Each Bank's Fee Policy is Different
You may be wondering whether there is a legally-enforceable limit on fees a bank may charge. The answer is: no. While banks are regulated by the Federal Reserve, the Fed sets no particular limit to bank fees.
Fortunately, new rules enacted by the Fed and going into effect on July 1, 2010 require banks to change to an opt-in policy (rather than opt-out) for overdraft protection program signup. These rules also prohibit banks from discriminating against customers who do not opt in to these programs.
However, the rules still set no particular limit on the number of times a person may get charged overdraft fees in a single day. And, it is likely that most customers will still sign up for the programs without understanding how costly they can be.
5 Tips on Avoiding Overdraft Fees
Even with the new legislation, consumers will still be paying billions per year in overdraft fees. Here are 5 tips for you to avoid paying overdraft fees:
1. Keep a reserve of at least $200 in your checking account at all times. This is not always practical, but the money pad will help you avoid overdrawing your account.
2. Connect your account to an overdraft savings account. Some banks allow you to set up a backup account. But, you will need to keep money in that account, as well.
3. Check your balance each morning and night. This can get tedious, but at least you will know where your balance stands.
4. Check your balance from your mobile phone whenever you are about to make a purchase. Again, this is not easy to do, but it does the trick.
5. Switch to a bank that does not charge overdraft fees. This is by far the easiest solution. Some banks will allow you to overdraw your account but still will never charge you an overdraft fee. It is worth it to seek out these banks - and it is the only sure-fire way of avoiding these fees in the future.
Follow these 5 tips to avoid paying overdraft fees.
