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Courtesy Overdraft: A Courtesy Service or A Profit Center?

Contributed by mm | January 6, 2008 3:10 AM PST

6352-checking.jpgHave 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?'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?

This Post Has Received 45 Comments. Share Your Opinions Too.

Deborah Commented on January 6, 2008

You just reminded that I accidentally found out in Britain that it is common to charge 25 pounds per day for up to 5 days to cover an overdraft. I found out by accident because it was casually mentioned. It really concerned me that I could accidentally have found out in a very expensive way. I would have expected that if I tried to take money from the bank machine and there wasn't enough it would refuse and tell me there wasn't enough. But actually it would give you the money and then charge you that much per day.

SingleGuyMoney Commented on January 6, 2008

I link my checking and savings together so if I happen to overdraft the account, the money will come from my savings. I think my bank charges $5 to do this but much better than paying interest or $29.

Frugal Dad Commented on January 6, 2008

After I was bitten by these ridiculous fees a while back I stashed away $500 in my checking account and pretend that is $0.00. This false ground zero gives me a little buffer should I drop below the line, without being charged for it.

Ed Commented on January 6, 2008

I have a "personal line of credit" tied to my checking from my Credit Union that acts as my overdraft. There is no fee to move money from one to the other, but interest does start from day 1. 10% interest rate is better than the fees and interest too.

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