Overdraft protection might seem like a great idea at first glance. After all, who would turn down free protection on their account, right? Well, it turns out this coverage is not all it’s cracked up to be.
Here’s what you need to know about overdraft protection
If your account is nearing a zero balance and you go try to buy or pay for something you can’t afford, would you rather have the transaction declined or would you rather the bank make up the shortfall — and charge you handsomely in the process?
That’s the question you need to ask yourself before signing up for overdraft protection.
“If your bank pitches you or has already conned you into signing up for overdraft protection, I want you to un-protect yourself,” Clark says. “A new study finds the typical interest rate you pay is the equivalent of 17,000% when your bank ‘protects’ you by paying for something when they know you don’t have money for it.”
In this article, we’ll take look at exactly how overdraft protection works and how you can opt out of it. Plus, we’ll name a couple of better alternatives to this so-called “protection.”
What is overdraft protection and how does it work?
Say you’re shopping with your debit card and you don’t have the funds to cover the purchase. Maybe you only have $90 in your account, but the bill is $100. Your bank will cover the difference for you and approve the purchase if you have opted into their overdraft protection program. But while this might seem like a good thing, it comes with a price.
Each occurrence of overdraft that your bank “protects” you from — by picking up the tab, temporarily at least — typically costs around $35. And if multiple overdraft transactions process in the same day, you can be hit with the fee more than once!
Of course, it’s still up to you to bring your account into the black in a timely manner even if you have overdraft coverage. Research shows most consumers do that within three days.
Meanwhile, a recent Consumer Financial Protection Bureau study found that most overdraft fees are incurred on transactions of less than $24 — like our example here.
If you extrapolate the numbers — taking out a $24 “loan” and paying a $35 overdraft fee three days later — it’s the equivalent of a loan with a 17,000% interest rate!
Unfortunately, it’s not just debit card transactions that are impacted by overdraft protection. The “coverage” can also apply to:
- ATM withdrawals
- Automated bill payments
How to stop overdraft protection if you already have it
Clearly, the numbers don’t work in your favor. But you can opt out of this coverage even if you already have it.
After all, it’s better to have a transaction declined at the register and be temporarily embarrassed by that than to pay 17,000% interest, right?
So here’s how you can opt out…
1. Check to see if you’re enrolled in overdraft protection
The first thing to do is figure out if you already have overdraft protection in place.
If you find you don’t have this coverage, you’re already all set and don’t need to do anything else. It’s only if you have overdraft protection in place and decide you don’t want it that you need to take action.
You can choose one of three ways to figure out what your overdraft protection status is:
- Call your bank and ask
- Visit a local branch to find out
- Log on to your account and search “overdraft protection”
2. If you’re enrolled, let them know you want to opt out
If you log into your bank account online to figure out if you have overdraft protection, you may see something like this:
This screenshot from the Wells Fargo overdraft protection page shows that the bank makes it easy to remove from your account. We’ve highlighted the removal option in the green boxes at the bottom of the page.
But even if you talk to a bank representative over the phone or visit a branch, the key is to let them know that you want to opt out.
3. Sign up for text message alerts
Instead of opting for overdraft protection, you can set up free text message alerts from your bank. That way, when your account is running low, you’ll know before you make another purchase.
It’s a great way to stay out of the danger zone without subjecting yourself to any possible ripoff fees.
“Your bank or credit union lets you know when your balance is getting low,” Clark says. “That should give you the ‘Whoa, be careful spending any money at all signa’ — at least until further deposits are made.”
4. Start budgeting
Want another way to make sure you don’t overdraw your account? Get a budget going in your life and you’ll be able to sleep well at night without worrying about where your next dollar is coming from or going to!
Our free budget worksheet is built on the CLARK Method. It offers five steps to better budgeting that’s as easy as C-L-A-R-K:
- Calculate your income
- List your expenses
- Analyze your spending and set goals
- Record everything
- Knock out debt and build your savings
Overdraft protection is a ripoff that’s pushed as a benefit to bank customers. Really, it’s just symptomatic of a larger trend of the nation’s big banks trying to rip off customers.
“Banks live by fee-ing you to death,” Clark says. “So look at online banks, credit unions and small local banks that don’t want to fee you to death. They actually want to serve you.”
To learn how to switch banks, see our step-by-step guide here! It’s easier than you think.