I have probably spent $500 in my life on overdraft fees.
Call me financially irresponsible. Call me poor. Call me extravagant. I have heard it all from my parents.
I hate overdraft fees immensely. The concept itself demonstrates the faulty business model upon which the banking industry has thrived for several decades.
A long time ago, in a white-collar criminal’s mind far away, high-ranking bank officials developed a method to protect their customers from public humiliation. If a consumer in a grocery store writes a check for a week of groceries for his family, the money from the account is withdrawn at a time of the merchant’s discretion.
If the money is not available in the checking account, then the bank will cover the charge for a small fee that was originally $25. Today, at my bank (Wachovia, if you are wondering), the charges are $22 for your first overdraft, and $35 for all subsequent offenses.
The bank heads rationalized this fee by assuming that the consumer’s paycheck has yet to post to their account, so a small fee incurred would have no effect on the financial health of the consumer.
Unfortunately, this “Overdraft Protection Program” is a common “feature” of most free checking accounts, and with the prevalence of the debit card, it has provided a new and powerful revenue stream banks cannot live without.
This overdraft fee system is under scrutiny in the major bank reforms in the United States. According to a Los Angeles Times article from November 2009, the banking industry has brought in $21.5 billion through overdraft and similar fees from the first sixmonths of last year, which is more than the total amount from 1999.
Should you be worried? Probably not.
The legislation zeroing in on overdraft fees calls for a cessation of these charges, effective July 1.
Many bank officials find this legislation a serious threat to the ability to maintain operation. The Wall Street Journal has reported that Bank of America is looking at losing somewhere between $150 and $200 million without these
fees.
Come July 1, this revenue will not be available to the banks. How are they going to make up this money? Cutbacks? Ha, yeah, right.
I am neither a student of business, economics, nor anything like that. I’m an English major, but I can tell you that if a company is not able to make money on an imaginary product that was sustaining them the way overdraft protection was, then beware of rising interest rates and other fees to take its place.
Whatever happened to the traditional bank practices? As I recall, a bank is set up to provide loans from the Federal Reserve to members of the community. It makes its business on the interest charged on the loans made to the borrowers.
A bank is supposed to be a place where you can deposit your money and have it resting there safely. Do you remember the days when free checking accounts you signed up for paid you yearly interest? No? That’s because we were just children in those days.
With the countless instances of negative press the banking industry has had over the past year, it is remarkable to learn that banks such as Bank of America will be experimenting with other methods of income, such as tacking on annual fees to credit cards and free checking accounts.
It will be the end of free checking.
According to AmericanBanker.com, the poorest 16 percent of the American bank consumers pay for nearly 90 percent of these overdraft fees. It is sort of difficult for the lower class to pull itself up when they cannot afford to pay rent, bills or groceries.
Honestly, I would be so crazy as to advocate not giving a bank your business until the bank reforms are in place in July. I cannot trust them to leave my credit card’s interest rate alone — what if they decide to retroactively raise my interest rate? They say in the fine print of my welcome packet that the terms of the contract are “subject to change.”
It wouldn’t be the strangest thing to happen. My mother’s credit card through Discover saw such a retroactive rise in interest rate.
Like the terms of her credit card, my business with the defunct banking industry is most likely subject to change.
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Here's an idea: if you don't like paying overdraft fees don't bounce checks. Problem solved.
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But bank policies are designed to get you to overdraft. Write a check and it clears nearly instantly. Deposit a check and you'll have to wait 3-7 days. Using your checkcard when you have insufficient funds but assume the transaction will be rejected? Nope. That $1.29 at 7-11 now includes a $35 overdraft fee. And since you are unaware of that, the next transaction will cost you the same.
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If you don't like banks don't use them. Problem solved, I don't like credit card companies so I only use cash.
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Come on Woody. You say that the bottom 16% of Americans based on income pay 90% of the fees, but why do you think this is?
If you want to hint at someone being irresponsible, why don't you take a look at those 16% who aren't able to balance their checkbooks.
In the days of online banking and free 1-800 numbers to check your balance 24/7, the argument of not knowing when a check clears is pretty petty.
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This just echos the first comment, but touching on the second, there are so many options out there for checking and credit cards that you will always be able to shop your business based on the best deal.
That best deal may be managing your own finances while banks struggle to cope with new regulation but as an educated group, we all have the benefit of being able to know when we'll be taken advantage of. You show your ability to do so in reading the 'fine print', but you take issue with the fees that you know exist but continue to accrue.
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Much like lottery tickets, overdraft fees might as well be a tax on the ignorant. The educated that are fully aware of the policies and have the means to avoid them have absolutely no room to complain.
You hate overdraft fees and you hate the areas that banks would be forced to recoup the lost revenue (something most fail to understand when supporting new regulation). What exactly do you propose?
You call a system netted around $43,000,000,000 last year indicative of a defunct system. Maybe its more of a testament to the fiscal irresponsibility of our general citizen (specifically the bottom 16%). I, for one, am in favor of this if it is what it takes to keep banks afloat and give loans to the fiscally responsible. Especially considering the alternative is punishing the other 84% more so than the 16% who can be considered the root of the problem.
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So lets see... you spend money that you don't have in your account (an overdraft), the bank lends you the difference to complete your transaction (a loan, so to speak), and then they ask you to pay them back in the form of a small fee.
Call me stupid, but that sounds about as reasonable as can be. Most banks offer customers free overdraft protection by linking your checking and savings accounts (if you have them both at the same place) and when you overdraft it is taken from savings.
I will agree that overdrafting on a small, petty amount should not equate to a $35 fee; there should be tiers.
As far as interest rates, don't rack up ridiculous debts and you won't have that problem. It amazes me that people these days think they are entitled to money they don't have (and no, I am not an old person).
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Why shouldn't the fee be more than just a nominal amount? What if two million people overdrew $25 tomorrow? That could materially impact a bank's capital position. Banks would rather have that money available to lend, and short of that, they should be able to collect as large a fee as the market will bear.
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lol English majors and their inability to balance a checkbook.
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^LOL!
But seriously, whatever happened to the idea of paying for something when you actually had the money. A simple idea, yet apparently no one can figure it out. Balancing a checking account is not hard. All it takes is basic math skills and responsibility. Oh no! The dreaded "r" word. Heaven forbid that I take time out of my schedule to be fiscally responsible. And how dare those evil banks take advantage of my right as an American to get free money and spend as recklessly as I want while not suffering any consequences.
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i think banks should go back to no having overdraft fees and people just get sued when they pass a bad check and have their name posted at the store saying they wont accept checks from you
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Although I do not agree with you, you make an interesting point. Banks don't have to cover your bad checks at all, but they do because it is profitable. Sure it's expensive for the check defaulter, but it's nice that you even have that option to begin with. If you choose to use it, sure, pay a fee... if you don't want to pay a fee, balance your check book.
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How is it more fair to have everyone (responsible or not) pay a yearly fee for checking, rather than have irresponsible people pay for overdrafting their accounts? If you need a loan from the bank to cover your bad checks, you should of course pay them money for it. If you don't like the high interest rate you are being charged for that service, get overdraft protection. If you don't like anything else about your checking account, switch to a different bank. Also, you might want to brush up on your knowledge of the federal reserve.
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You are an idiot, and you'll probably be living off your parents for the rest of your life. If you can't figure out the concept of purchasing goods and services with money that you actually have, you are not going to make it very far post college.
How does the CT allow articles like this to be published? This is an embarrassment to Virginia Tech. I hope any potential employers or graduate admissions departments out there reading this realize that we are not all this stupid.
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You SO need to check the role of the Federal Reserve, which is neither Federal,nor holds Reserves: re role of Banks.Great that US has banking reform underway-sorely needed worldwide
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Hokienomics: that's a bit rough, no? I know the writer to be many things, but an idiot is not one of them. Nor is there any reasonable justification for deeming him an idiot based on the content of his article.
Unlike most on here, I believe Ben is being too nice to the banks. Those bastards, aided by the politicians in whose pockets they live, just looted trillions of dollars from us, the American taxpayers. Did this grotesque form of corporate welfare aid the economy? Hell no. Did it result in million-dollar bonuses for the same heisters that effed up the economy in the first place? Somehow, insanely, yes.
In closing, I'd like to point out that Ben never claims that he is a person of responsibility; he merely points out that the banking system is structured in such a way as to achieve maximal exploitability vis-a-vis account holders. Try and disprove THAT argument. Exactly. Even if you utterly detest Ben (and there's definitely no reason to do that), taking up for a bank? Really? I'd just as soon defend Bernie Madoff.
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You know what's a bigger "problem?" Credit card interest. I guarantee you that people pay more in finance charges from credit cards than overdraft fees from checking accounts. The principle is the same: it costs money to have a credit extended to you - whether it's in the form of overdraft protection, or a credit card that you don't pay off monthly. Is it exploitive? Not necessarily. You are essentially paying for a service. They are, after all, giving you money that you don't have.
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You want evidence that he's an idiot? Read the first line of the article. I'm beginning to think you're an idiot too.
In closing, neither of you have a clue about banking, economics, or even basic household finance, so quit making idiots of yourselves and embarrassing the rest of the school.
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Banks are structured to maximize profits? Holy crap, that concept may just revolutionize the whole idea of capitalism.
Hokienomics is right. You're an idiot, too.
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