Overdraft protection How the bogus bank ‘protection’ works and why you should opt out immediately

Alex Thomas Sadler
Overdraft protection | How the bogus bank ‘protection’ works and why you should opt out immediately

If you want to keep more of your hard-earned money, avoiding unnecessary fees should simply be part of your everyday routine.

Some fees are obvious, like ATM fees, so it’s just resisting the convenience of using any ATM around and instead finding one nearby that won’t charge you the extra fee. (Here are more ways to avoid paying ATM fees.)

And then there are other fees that aren’t so obvious, or people just don’t realize they can be avoided — including one that’s costing Americans billions of dollars every year!

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Overdraft fees cost Americans $11.2 billion a year

According to the Consumer Financial Protection Bureau (CFPB), banks made about $11.2 billion in overdraft and non-sufficient fund fees in 2015.

And at $35 a pop, it’s not that surprising that banks were able to rake in that much.

Consumers’ lack of trust and understanding of the banking system in general is a big problem in the U.S., which is why Pew and other groups are pushing for new rules that would help protect customers against banks’ costly practices, which very often aren’t clearly communicated.

“Pew urges the CFPB to write new rules to ensure that overdraft programs are safe and designed only for infrequent and accidental occurrences. The bureau could achieve this outcome in a number of ways including, by limiting the size of overdraft fees, the frequency with which they can be incurred, or the overall cost.”

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How overdraft fees work

A big part of the reason why this costs consumers so much money is because many don’t realize they can opt out of “overdraft protection” — which is just the bank’s way of saying it will “protect” you by paying for something you can’t afford and all you have to do is pay the difference plus a huge fee for the “service.”

The way an overdraft fee works is if you make a transaction that drops your account balance below zero, the bank covers the difference — and then charges you a fee for it — typically around $35. Plus, you also owe the bank the difference in the amount it covered, which may be automatically taken out of your other accounts.

Overdraft “protection” programs typically cover checks, recurring online transactions, debit card transactions, and in some cases, everyday debit card and ATM transactions.

Most U.S. banks (84% of the largest) allow customers to overdraw their accounts when they don’t have enough money to cover a transaction, according to a report by the Pew Charitable Trusts.

And the $35 fee typically isn’t caused by a big purchase — in fact, the CFPB found that the median transaction amount that generates this type of fee is just $50 — and for debit card transactions, a mere $24.

So a $50 purchase just became an $85 purchase, plus any other fees the overdraft may cause — talk about a huge waste!

Bottom line: Overdraft protection is just another costly bank fee that protects you from nothing. In fact, most people don’t even want it — the bank may have automatically enrolled you without you even realizing it.

RELATED: Budgeting 101 Guide: How to create and stick to a budget

How to opt out of overdraft ‘protection’

Pew found that more than two-thirds of people who consistently overdraw their account would rather have the transaction declined, but they didn’t know that was an option. Because of course the bank isn’t going to tell you that part.

So if you don’t want to risk getting charged overdraft fees, you have the right to refuse overdraft protections. Just contact your bank and tell them you want to opt out.

If you don’t have enough money in your account to cover a purchase, the transaction will be declined — but you will avoid owing the bank the difference in the amount plus the extra $35 fee.

This is why checking your accounts daily is crucial — not only to spot errors and potential fraud, but to also know how much money you have in your account — so you can make spending decisions accordingly.

A lot of people are enrolled in overdraft protection without even realizing it. So if you aren’t sure, it’s important to check with your bank. And even if you are signed up for it, you can always opt out at any time!

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