Have your bank ever promoted the new generation of overdraft service to you? If you occasionally write a check that exceeds your checking account balance, your bank will gladly pay on your behalf to avoid your embarrassment. Of course, there will be a "convenience" fee.
But do you know consumers paid $17.5 billion fee in such "convenient" overdraft protection arrangements?
Bankrate.com's exclusive 2007 courtesy overdraft study can be a good resource to help you understand the situation. Simply put, banks are growingly seeing the overdraft protection as a profit center. Your bank is more than happy to pay an otherwise-will-be-bounced small check for you, for an average of $29 per-item fee. Some banks will only slash you with a per-day fee for every day your account is in deficit.
Even more aggressively, some banks will include the overdraft credit limit into your checking account balance when you inquire via an ATM machine, thus fooling more customers to withdraw money they don't have. Worse, customers who don't reconcile their account regularly won't notice the overdraft until the next statement.
Why not? A typical overdraft is less than $100, an if the bank can charge $29 on that item, with very small risk of not getting paid afterwards (banks with your checking account has much more knowledge of your cash flow and thus can set the credit line accordingly), such $29 will be pure profit.
Personally, to avoid overdraft I have always been keeping more than enough cash in my checking account. Yes, one will earn less interest on cash parking in checking accounts (for example, 3.25% APY in ING Direct Electric Orange checking account) vs. high-yield money market accounts (say, 4.10% APY from ING Direct Orange Savings account), but if you are served with overdraft fee more than once a year, you can easily be better off by keeping a small cash cushion in your checking account. After all, the annual interest difference for $2,000 between ING Direct's Electric Orange and Orange Savings account is only $17.
What's your overdraft experience? And do you have any tips of avoiding the outrageous "convenience" charge?