The Checkout

Protect Yourself From Overdraft Protection

District writer Andrew Trotter admits he's not the most careful person when it comes to balancing a checkbook. After he bounced a couple of checks a year ago, his bank suggested he sign up for overdraft protection through a bank-issued credit-card. In his case, if there was not enough money in his account to cover a check, his credit card would automatically make a cash advance (rounded to the next $100) to his bank account. "I was encouraged to use this not just as a backstop but as a convenience so I could write checks without worrying about my balance (at least up to my credit-card max)," Trotter wrote me in an e-mail.

That seemed fine with him, in spite of a per-transfer fee of $10 because the card's overall interest rate was 7.9%. However, it was only after he used the card for $900 in overdraft protection that he learned the interest rate for cash-advances was 19.9%. What's more, he learned that his monthly payments are first used to pay off the lower-interest balance, which now stands at around $3,000. As he found in the fine print on the back of his bill: "We will allocate your payments in the manner we determine. In most instances we will allocate your payments to balances..with lower APRs [annual percentage rate] before balances with higher APRs. This will result in balances with lower APRs (such as new balances with promotional APR offers) being paid before any other existing balances."

So even though Trotter quickly paid back most of the $900, it went to the $3,000 debt. Until he pays all of that off, his $900 will be sitting there, collecting interest at a rate of 19.9 percent. "That's the real thing that galls me," he said on the telephone, eager to point out the pitfalls of using a credit-card for overdraft protection to other consumers.

Trotter is not alone. A new study by the Center for Responsible Lending, a nonprofit research and policy group whose goal is to eliminate abusive financial practices, says that overdraft protection may be a debt trap for many Americans, particularly repeat users.

Banks started offering overdraft protection to help customers who occasionally bounced a check. It's been a growing business for the banks, with the Center now estimating that checking-account customers pay more than $10.3 billion in overdraft loan fees every year. And most of that--$7.3 billion--is paid by repeat borrowers, the Center says. "A mere 16 percent of bank customers account for nearly three-quarters of all overdraft loans," it concluded from a telephone survey it conducted between October 2005 through January 2006 of 3,310 households.

The center said it found "some intriguing--and troubling--information:"

* The average non-repeat user of overdraft protection is 40 to 44 with a household income of $35,000 to $40,000. About 71 percent of non-repeat users own their own homes.

* The average repeat user is between 35 and 39 and has a household income of $30,000 to $35,000. About 61 percent of repeat users own their own homes. More are likely to be single and non-white.

The Center says the data suggests that overdraft protection "may exacerbate the income deficit problem by trapping these families in debt." So once they bounce a check, they end up paying high fees and interest rates that lead to more bounced checks--and more overdraft "protection." Among other things, the center called for greater disclosure and clearer warnings and a requirement that borrowers affirmatively and explicitly consent before they participate.

Let me hear about your experience with overdraft protection plans.

By  |  May 1, 2006; 7:00 AM ET Credit Issues
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Comments

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I use ChevyChase's overdraft protection and it seems to work pretty well... Bear in mind though that I don't have creditcards, and it comes into play usually when I spend money and the money I'm transfering from INGDirect takes longer than anticipated to cover it...

Posted by: Anonymous | May 1, 2006 8:41 AM

I allowed a bank teller to sign me up for overdraft protection last summer because I knew I would be in a nursing home following surgery for a few weeks, and wanted to be sure my bills would all pay automatically without any bounced electronic payments. Turned out I didn't need the overdraft, but was not happy to find out later that the bank charged a $3 monthly fee for it, after the teller told me there was no charge. The bank not only wouldn't refund the fees when I cancelled the service a few months later, but argued that it was only $2 per month for overdraft protection (they never did explain the discrepancy). Bank customers beware.

Posted by: ohio | May 1, 2006 8:46 AM

Sounds like another case of an adult not reading the disclosure document(s) and then whining about the results.

To ohio, did you see the list of bank fees? All banks are required to have them. You signed form(s) saying you read them when you signed up. If you didn't read, your fault. If you had the fee list and it said "no fee", you have a case against the bank.

Posted by: Anonymous | May 1, 2006 8:54 AM

In the three years after I graduated high school, I used my checking account like a credit card, over-drafting all the time. When I was twenty-one, my older brother pushed me to get a credit card and establish credit. I had been raised to be wary of credit cards, and had an aversion to paying interest. Little did I realize that fees were essentially the same thing.

In the four years since, I have overdrafted maybe twice, and instead pay for most things with a credit card, which I pay off every month. I did the math once, and it turned out I paid $1,400 in overdraft fees to the man during those early years of financial independence. Now, I am on a mission to get that $1,400 back. How, you ask? The miracle of the cash-back credit card and the 0% intro APR. Unlike so many of my twenty-something peers, I have aggressively managed my credit so that now I qualify for good interest rates (8.99% instead of the 21.99% I was getting back when I was 21), but I don't use them because as soon as the intro APR stops, I get a new card with a new 0% intro APR. I pay the man no more, and now, he pays me.

American Express shelled out $358 last December, Bank of America paid $61 in August, and HSBC owes me $50 right now. And how much interest have I paid them? About $4.

$465 down, $935 to go. Suckers.

Posted by: Tyson Lewis | May 1, 2006 9:52 AM

The poster complaining about "another case of an adult not reading the disclosure document(s) and then whining about the results" sounds exactly like a bank employee. Let me educate you about disclosure statements.

Banks deliberately write them to be a confusing and obtuse as possible. They've admitted this under oath before Congress when they lobbied against being required to use simple English in disclosure statements. They disclose everything, but in pieces so you have to be an attorney to piece it all together--just like executive pay "disclosures" in proxy statements. It's all there, just in a hundred pieces. Plus they deliberately use small fonts to make it hard to read. No one does this unless they have something to hide.

The poster's freeedom of contract argument is old, rejected common law over a hundred years old. Freedom of contract assumes the parties understand the terms of the contract. This is not possible in take-it-or-leave-it consumer banking contracts (called contacts of adhesion). If the banks and their shills want to stand on freedom of contract, they can easily write clear, understandable contracts so that their customers know exactly what they're getting into. Their refusal tells us all we need to know. Those wishing to make old, tired and worthless libertarian/anarchist arguments should go back to reading Ayn Rand and her daydreaming apologetics for wealth. They sound just like the self-righteous who don't want to hear about other people getting shot in bad neighborhoods: Hey, no one made you live there, you're free to move to Chevy Chase, so don't complain about being shot in the back in broad daylight by a gang member. You knew it was a bad neighborhood when you freely chose to live there.

Moral of the story: USE A CREDIT UNION!

Posted by: Nick | May 1, 2006 9:55 AM

I have a $2000 line of credit at my credit union which serves as my overdraft protection. Even though the interest rate is high at high 12.5 %, there are no per transaction fees and only the exact amount of the overage is transferred to my line of credit. I end up paying only very miminal interest charges.

Posted by: Dawn | May 1, 2006 9:58 AM

"Andrew Trotter admits he's not the most careful person when it comes to balancing a checkbook". And therein lies the problem. Fiscally irresponsibile folks get no sympathy from me. If you're going to be a borrower, you don't get to bellyache about the procedures employed by the lender. Not to mention the fact that these disclosures were laid out in front of Mr. Trotter when he signed up for OD protection. I'm sure he'll read the fine print a little more carefully next time.

Posted by: Anon | May 1, 2006 10:09 AM

This comment is not about overdraft protection, but the way card companies apply your payments.

I have a Circuit city card I used to buy a $2000.00 TV with no interest for 18 months. I then used it for a hotel room which was about $150.00. So they start applying the payments to the 2000.00 no interest balance.

This practice stinks. Luckily I had the money to be able to just pay off the whole balance. If I didn't who knows how much that $150.00 would have turned into.

Posted by: Bob | May 1, 2006 10:21 AM

Sorry but the Schumer Box on the back of his credit card offer showed clearly the APR for among other things cash advances. Writing checks for more money than you have in the account isn't 'an overdraft' really - it's fraud.

Posted by: AngloAm | May 1, 2006 10:26 AM

It is common knowledge that cash advance fees are much higher than your regular APR. It is also common knowledge that lenders apply your payment to the balance with the lowest APR. When I think 'overdraft protection' I think $100-$200 max, not $900. It sounds like Mr. Trotter needs to plan his finances better, read the fine print and specifically ask about APRs and fees before signing on the dotted line. Or -- if he doesn't wish to do so, he should pay for the service. Yes, financial institutions make it hard for consumers to understand contratcts, that's when you ASK QUESTIONS about the important details before signing anything instead of hoping for the best.

Posted by: Elle | May 1, 2006 10:32 AM

I find it strange when members of the public, like Anon and the third poster, feel more sympathy for large corporations with many resources and the sole goal of earning profit than they do for their fellow consumers who generally have many fewer resources (money, lawyers, etc.) and have many purposes dictating their time. Why is this? Why do we feel it's our own fault when we are duped by fine print, overwhelmed by changing policies, or simply aren't aware of the minutiae of bank regulations over us? Sure, we need to be responsible, but the way I see it, we expect much more out of your average uneducated consumer than we do wealthy corporations. Someone explain this to me. It should be their privilege to serve us not our privilege to be served by them.

Posted by: Allison | May 1, 2006 10:37 AM

Tyson Lewis' comment about 0% cards prompted me to caution people to be careful about having too much opened and closed accounts. When I checked my credit report, I found a strike against me for having too much revolving credit. I only have one or two credit cards at a time and have no debt (other than my mortgage), so the only cause that I can think of is the zero interest cards that I've signed up for and later canceled. My credit score remains excellent, but I'm now going to rely less on the 0% cards to manage my money.

Posted by: Chrissy | May 1, 2006 10:48 AM

PLEASE: EVERYONE OUT THERE BE VERY CAREFUL WITH THESE OVERDRAFT PROTECTION SERVICES!!!! THEY CAN RUIN YOUR LIFE!!!!!

My husband and I have four kids, are in our forties, and have always been pretty responsible financially because we lived on a very moderate income for most of our 20 years of marriage. About two years ago, our credit union here in New Mexico instituted (without our request) an overdraft protection program in which they would cover up from $200 to $500 in overdrawn checks for $25 each. We never got anything written beforehand, little was specifically outlined on their website, and as a result we had no idea about it's ramifications.

Having dropped to living on one income while I finish a nursing degree, we were/are always close to "$0.00", so occasionally when it was applied to overdrafts or debit purchases, we just thought it was a beneficial service we were grateful for. Especially with four kids who were constantly needing stuff for school, soccer, etc.

However, after our mortgage company accidentally double debited an online payment from our checking account, (which was covered by but severely depleated our own funds) a financial nightmare we NEVER thought could happen to us (which took us almost a year and a half to recover from) ensued.

Because we are a typically busy family, we didn't check our account for a couple of business days. (It was the week of government payday, we knew our bills were paid, and we had cash for our other expenses.) Meanwhile, at least 30 checks were either paid or returned by way of the overdraft/returned check policiy at the credit union. The killer was that many were for realtively small amounts, such as school lunch fees, the electric bill, Girl Scout cookies, grocery store trips, Dominoes Pizza, etc.

At first, the amount of the check plus a $25 fee was absorbed by the overdraft protection system, but that quickly overtook the $500 dollar limit and subsequent checks were returned and a fee was charged to our account. By the time we finally got on top of the situation, we were over $2000 in the hole--THE DAY AFTER PAYDAY. Yes, it absorbed an entire paycheck, AND still kept on going.

When we discoverd the mess, we called the CU right away assuming this was all one big mistake. It wasn't, and the bank was no help at all at first, suggesting we dredge up the extra $2000 to bring our account current, all the while happily making themselves rich off of us and returning checks all over the universe. Not having access to that amount of money on short notice, we finally begged them to just close the account until we could figure out what had happened.

The credit union ended up seizing over half of our next six paychecks to pay their overdraft and returned check fees first. and as a result every major expense we had, from our mortgage to credit cards, got behind. Buying groceries and avoiding utility company disconnections was about all we could afford for the entire summer that year.

With the systems that many businesses use to cover bounced checks they receive, we paid anywhere from $25 to $50 in additional fees for each one ( one of which was for $2.50). The collection agencies were even selling our accounts to one another as we were dealing with them, and at one point a check we thought we had repaid was referred to our local district attorney's "Bad Check" program (fortunately, a worker there had had the same thing happen to him, and took the time to listen to what was happening to us, and we cleared it up right away.)

I am not saying we were victims, but this sure was a situation we were not prepared for in terms of our economic situation, or our understanding of finance. If we had had some sort of additional credit available or a higher income, it would have been a frustrating but manageable crisis blip on the radar of our lives. Instead, we have permanent reports on our credit or in check guarantee systems we will have to rebuild over the next few years. Also, the shame and humiliation that goes along with this kind of "fall from grace" is something that average, middle class people are not prepared for. We were depressed for months.

Needless to say, we don't have this service on our account anymore, instead keeping a $500 savings account that can be used instead. We also don't write many checks anymore (got out of the habit when no one would take them from us for the better part of a year!!!) Never a day goes by where I don't check our account at least once, either.

Thank you to anyone who took the time to read through this long comment. I hope it helps in some way someone else who may have gone through something like this, or could in the future. (And it was kind of cathartic for me to write!)

Posted by: financiallyshellshocked in NM | May 1, 2006 10:51 AM

i am amazed at how unsympathetic you human beings are to one another. would you rather align yourselves with the machinary of a system that is devised to keep people in debt or with people who are struggling to stay "afloat"? i dont get it. show some compassion.

Posted by: james resinquist | May 1, 2006 11:02 AM

"I find it strange when members of the public, like Anon and the third poster, feel more sympathy for large corporations with many resources and the sole goal of earning profit than they do for their fellow consumers who generally have many fewer resources (money, lawyers, etc.)"

Why? Somebody owns those corporations too. Perhaps very rich people, but perhaps someone's retirement fund owns a stake in the debt, albeit indirectly. And secondly, it is this guy's fault.

"District writer Andrew Trotter admits he's not the most careful person when it comes to balancing a checkbook."

Oops.

"After he bounced a couple of checks a year ago, his bank suggested he sign up for overdraft protection through a bank-issued credit-card."

Well, presumably he can read--he wrote to Caroline. He also has at least two minutes of free time in which to read--again, because he wrote to Caroline.

Furthermore, since he qualifies for a 7.9% interest rate on his purchases, he's probably got decent credit and might qualify for another good card to which he could transfer the balance. Perhaps not, maybe for fine print reasons, but worth considering.

But in the meantime, since there were at least two steps at which he could have avoided this problem--by being careful with his check writing and reading the fine print for a new credit card--it's hard to have too much sympathy. I'm saving my sympathy for the person who was double billed by the mortgage company.

Posted by: No sympathy | May 1, 2006 11:09 AM

New Mexico, from what you describe, you sound like you have a cause of action against your mortgage company for basically stealing an extra payment from you illegally, causing you all this trouble.

To the others that are quick to play the violins, please, get a life. If you plan on bouncing checks (and if you sign up for the overdraft protection, you pretty much do), then you get what you deserve fee-wise. If you don't read the fine print, you have no excuse. If you can't understand it, then get someone smarter than you to explain it to you. Otherwise, how about not spending money you don't have? It drives me crazy that Americans can't seem to live within our means - we feel entitled to a nice car, so we lease instead of buy. We feel we deserve the VCR, DVD, premium cable, whatever. Don't get me wrong, I think it's great that all this technology is out there for us to choose from, but DON'T BUY IT if you CAN'T PAY FOR IT!

Allison, I'm not sure what the purpose of your post is - are you suggesting that most people are dumb, ignorant, or incompetent? That it's not their fault when they make the choices that lead to their own problems? Sorry, I don't buy that (largely liberal) argument. Let's face it, most people know what they are doing, they just tend to think short term, not about consequences down the road. No delaying gratification in this culture, thank you very much.

Posted by: JD | May 1, 2006 11:15 AM

I'll show a lot of compassion for someone like financiallyshellshocked in NM who really was ripped off by the financial institutions. But someone who "he's not the most careful person when it comes to balancing a checkbook" or doesn't bother to figure out what he signed up for is simply lazy and/or irresponsible.

Posted by: Elle | May 1, 2006 11:16 AM

"I'm saving my sympathy for the person who was double billed by the mortgage company."

Amen. The problems caused by lack of funds was not the fault of the person.

I have a coworker that went negative on his checking account. His bank charges him $25 everytime it is negative and when a check comes in when it is negative or every debit card purchase when negative. He knew this when he opened his account.

He also knew that they post all weekend transactions on Monday morning. He also knew that they post them in descending amount order - biggest one first, smallest one last.

He forgot to record a large check. It cleared over the weekend. He made 14 purchaes over the weekend. Come Monday morning, he got hit with 14 overdraft charges - costing him $350. If they had posted in reverse order, only the large check would have brought him under zero and his fee would have been $25.

He was complaining and moaning about the bank's unfair practice. When he said he knew the facts beforehand, I said "them's the breaks". He said it was wrong the way the bank was doing it. I told him if he didn't like it, he could move to a new bank. Simple as that.

Posted by: Third poster here | May 1, 2006 11:25 AM

I just got overdraft protection and, so far, think it's a good thing. I'll keep an eye out for the problems that can arise. Thanks.

Posted by: jim | May 1, 2006 11:25 AM

As a freshman at Xavier U. in Cincy, my son was signed up by US Bank to open a checking account with OD protection. A debit card was issued with a VISA logo. The VISA logo allows access to the account without a passcode similar to a credit card. Last summer his card was stolen by a pickpocket in Europe who was able to draw about $250 to pay for goods he bought with the card. My son called the bank which froze the account and reimbursed my son for the fraudulent draw. The draw actually overdrew his checking account and was covered by the OD protection and treated like a credit card draw. Not having signed up for a credit card he kept getting statements for a credit card with an odd balance and no reference to any purchases. After many calls to US Bank he finally figured out this was the overdraft protection which cost him about $200 in late payment fees until he figured out what was going on. The pickpocket made out and US Bank made money. My son is out $200 and the merchant who accepted the stolen card lost $200 worth of goods which he was charged back on. Nice product!

Posted by: Rimantas Aukstuolis | May 1, 2006 11:45 AM

Do not get overdraft protection in any form.

Most banks automatically include an overdraft "limit" whenever you open a new checking account with them. Ask for an overdraft limit of ZERO ($0.00).

Do not link your checking account to a credit card, a standalone overdraft line of credit, or god forbid, a home equity line of credit.

Without a backup, you will have to learn how to record ALL transactions in your checkbook register, balance it EVERY month, and be responsible for your own actions. Writing a check without enough funds is a CRIME.

Not ready to do any of this? Then don't start crying and whining like a small child when the overdraft fees and interest start piling up. You're an adult, so act like one.

Posted by: Ken L | May 1, 2006 12:10 PM

To respond to No Sympathy and JD: sure people own those corporations but my purpose is to challenge the notion that when a consumer screws up and incurs huge fees that it is result of only his/her fault. Yes, we should all be perfect and never make a mistake. But should we make a mistake, do the consequences need be so dire? Is that really fixing the problem or just making the problem worse? When a large corporation is running the bank and holding your money, they also wield a lot of power and control over you. There are policies in place that allow for this imbalance and my point is that it does not need to be that way. Many of us have just gotten used to that point of view: good corporation, naughty consumer. Being a large corporation, capable of making big profits and having so much sway is a privilege. With that privilege I expect them to have to do more to earn my trust and business.

Posted by: Allison | May 1, 2006 12:26 PM

Thanks Allison, that's actually a reasonable point of view.

Although, as a conservative, I'm loathe to suggest more government regulation...I must say the uniform disclosure box on all credit card soliciations is a very simple and straightforward way to communicate the terms of the contract. Maybe we need something similar for overdraft accounts, something that anyone who has authority to enter in a contract could understand (i.e., not a child or mentally disabled).

Then, anyone who gets dinged by the companies for 'unreasonable' fees has no excuse. Like a hard drinker complaining about liver disease, or a smoker about lung cancer. Remember when writing bad checks was a crime (called 'uttering', at least in my state)?

Posted by: JD | May 1, 2006 12:32 PM

Your article states, "As he found in the fine print on the back of his bill," he was paying different rates for his outstanding balances. As much as I hate to seem insensative, this guy is an idiot for not reading the fine print first and for letting himself get in this kind of trouble. This should be called 'stupidity interest.'

Posted by: Sean M | May 1, 2006 12:38 PM

While living in New York, I opened a free checking account with Chase Bank, and they offered me a free $1000 overdraft line of credit. It's really fantastic! I moved out of NY and don't even use the checking account anymore, but I still keep the account open because of the line of credit. If I get in a cash pinch for a few days or weeks, I can take out cash, and they don't charge me any fees: they just transfer the exact amount of my withdrawal (i.e. the overdraft) from the overdraft account. And, no APR as long as I pay it back by the end of the month.

Plus, having an extra line of credit that I seldom use is good for my consumer credit rating.

I think if you can get overdraft protection separate from a line of credit that you use, it's a great idea... particularly if they don't charge you a fee when you use it.

Posted by: Chris | May 1, 2006 12:45 PM

I have overdraft protection with Bank of America, and have been quite pleased (it has kicked in only once in 3 years). The trick to avoiding the problems you warn of in your column is to only use the credit card linked to the overdraft protection for that purpose only and nothing else. Thus, I have two credit cards - one with another bank that I use for purchases, and one through Bank of America that stays in a drawer and only takes on a balance if overdraft protection kicks in - which I promptly pay off and avoid any finance charges.

I also disagree with Ken L's comments above. While it is true you should never write checks for funds you don't have, what many people unwittingly don't realize is that if you use a check card, there are certain purchases you make that actually put a "freeze" on a certain dollar amount of your funds, for up to two weeks, rendering them unavailable for anything else.

For example, I recently rented a car at Avis, and if you give them your check card to reserve it, they automatically "freeze" $400 in your bank account, which is released/freed-up within TWO WEEKS once the car is returned and you pay them, but during which time those funds are rendered unavailable. What that means is that you could have $500 in your checking account for example, then reserve a car for one day (maybe $80), and write a check for $200 that same day. However, if that check is cashed before the $400 Avis automatically put a hold on is released, your account will show up as only having $100 available and you will be charged for insufficient funds and/or the check will bounce. This hold remains in effect even if you pay them with a different card when you return the car.

Here is an instance where having overdraft protection would be a nice failsafe to have b/c you are NOT writing checks for money you don't have. This money is yours, but it may have a hold on it and you may not even be aware of it. Holds are also sometimes put on your funds when you use debit cards at gas station pumps as another example, and this "fine print" may not even be posted.

Posted by: Jason M | May 1, 2006 12:46 PM

Five years ago my bank offered this service. A bit of simple math and a couple of questions to a teller told me all I needed to know. Just remember this. Most banks don't exist to help the average customer. Banks exist to make money for a select few. Be aware, and be careful.

Posted by: Ken | May 1, 2006 1:09 PM

I had an "overdraft protection" account with Wachovia which was in fact a credit card. The problem was that when I moved and changed the address on my Wachovia acocunt, the address on the overdraft plan did not get changed. So, around the time of my move (when I admittedly was not as on top of my bank statements as I should have been) one check was paid before another cleared and the overdraft kicked in. I never learned about this, however, because I was not receiveing the overdraft/credit card statements at my new address, nor did a bounced check get returned. It wasn't until I pulled my credit report nearly a year later when preparing to apply for graduate school that I found I had this outstanding balance, which of course had multiplied with late payment fees and interest, etc. Wachovia apologized for the clerical error of not changing my address on all accounts when I asked them to and removed the item from my credit report, but I will definitely not sign up for overdraft protection in the future as it adds one more account to keep track of.

Posted by: Michael R. | May 1, 2006 1:16 PM

I am sympathetic to consumers who get duped by the deliberately misleading practices and language of the banking industry. BUT, writing checks for more than you have in the bank is called living beyond your means. Obviously, there are people who are stretched really thin because of low wages/etc and may be overdrafting to buy milk for their kids. But Bob who bought a $2,000 t.v. for no interest for 18 months isn't one of them. Here's an idea: don't buy a $2,000 t.v. if you obviously can't afford one. If you have to buy a t.v. or furniture using one of those No INterest till 2008 gimmicks you can't afford it. Get youself a 19-inch t.v. for $120 and enjoy yourself. I've bounced a check or two or three in my lifetime but it's never been for more than $20-$50. But bouncing more than $900 worth in checks as Trotter did??? HOw is that possible unless you're just living as if your account balance holds no meaning for you. I do have overdraft protection but it's linked to my savings account which means I have to have some savings or there's no protection. I keep the service which costs about $2 per overdraft just in case I've made some accounting error. But I can't imagine a circumstance in which I might overdraw by more than $50.

Posted by: debtfree | May 1, 2006 1:32 PM

Wow. I have an overdraft protection link between my checking and savings account free of charge from Wachovia, and it is a godsend. I've only had to use it twice in four years, and all it does is move money and charge me $10. I've never heard of this practice, and it reassures me once again that Wachovia is the best bank to deal with out there. (I swear I don't work for them!) It seems like people should read the fine print - CAREFULLY - before making these decisions!

Posted by: bamagirlinVA | May 1, 2006 1:38 PM

Overdraft protection is like credit cards--don't use what you can't repay within 30 days. As a failsafe, overdraft protection is great. It's kicked in twice in the last 5 years for me to prevent my mortgage payment, which is an electronic debit to my account, from bouncing when deposited checks did not clear as fast as I thought they would. In each case, I "repaid" the money within a few days at a finance charge of less than a dollar, as I recall.

Posted by: eb | May 1, 2006 2:04 PM

Allison, I'm glad you are concerned for the subject of Caroline's column here, but there's a reason he's paying outrageous penalties: He wrote almost $1000 in bad checks.

He is promising money he does not have, and he does this on a regular basis. It behooves him, therefore, to find out the exact penalties.

There are plenty of legitimate complaints against corporations in which the consumers deserve far more consideration than they get. To see a few, see consumeraffairs.com. This guy's complaint, however, does not fall into this category. Besides, he's not without options: He could look into other means to pay off the entirety of the credit card bill by transferring it, or getting a secured loan, or just paying it back straight.

Posted by: No Sympathy | May 1, 2006 2:13 PM

ALWAYS keep your low interest and high interest balances SEPARATE. NEVER make purchases with your promotional rate card. This keeps the sharks from getting you.

Posted by: andrew | May 1, 2006 2:42 PM

Hey, here's an option. Don't buy things you can't pay for (except for emergencies and that TV is not an emergency).

Posted by: Non debtor | May 1, 2006 3:30 PM

Instead of relying on overdraft protection and the high fees associated with each overdraft ($25), instead I choose to take out a cash advance on my Purdue University Credit Union credit card. Sure, it costs a small fee for the advance, but the fee for one $1,000 advance sure beats multiple $25 fees for overdrafts. The absolute wonder of this credit card is that it carries the same interest rate for cash advances as for regular purchases, and it is the lowest interest rate I have for all my cards! No one will ever make me give up this credit card, the interest rates and fees (not to mention the polite service) are the best I've ever seen.

I don't use this option often, but since I purchased an older home about a year ago, I've discovered that sometimes at the end of the month I'm confronted with a several thousand dollar repair bill that I hadn't included in my monthly budget. Having the flexibility to cover these expenses promptly and in an economically responsible way is a huge help.

As several other people have noted, banks are in business to make money; credit unions are in business to help the credit union members. Check out your local credit union and see if the services are better than your current bank.

Posted by: Diana | May 1, 2006 4:03 PM

I don't see it mentioned here, but for years, I used overdraft protection tied to my savings account. Since most of my bounced checks would occur due to math errors or being unaware when my wife used the debit that day, the overages were small and easily covered by the savings account. If I was short, the difference was deducted from my savings account. I got one freebie a month and every subsequent one was cost a buck. Not a bad way to avoid OD charges.

Posted by: Patrick | May 1, 2006 6:15 PM

Tyson, you're not doing your credit rating any favors by constantly opening up new cards!

Posted by: Anonymous | May 1, 2006 6:29 PM

Always do your research before opening a new financial account. Don't trust a banker when they SAY free. READ the terms and fee disclosure first. Banks post them on the Internet. If you can't find the documents online and decide to open an account in a branch, don't be afraid to tell the banker you want to take the paperwork home to read it carefully BEFORE you sign.

Posted by: ProfessorB | May 2, 2006 9:37 AM

To financiallyshellshocked in NM:

Send a letter to the mortgage company about their double-dipping for mortgage payments and the financial pain that resulted from this situation.

Keep a copy of the CU statement and copy of the check showing the overdraft and ask for a letter from the CU that specifies the overdraft charges paid for because of the problem.

File a request to the mortgage to pay back the overdraft (and interest) charges.

If the mortgage company refuses, file a small claims action for the expenses (bank charges and court fees) and ask to have the negative reference removed from all places (check cashing systems, credit reports). If the mortgage company decides to settle, get something in writing from the company that mentions an acknowledgement of the mistake.

Give this letter to your CU or bank and ask them to rescind the overdraft charges.

If your CU refuses, do the same thing as the case with the mortgage company and be prepared to switch the bank/CU if necessary.

I had to do this years ago when Shell Oil Company (gas card) misencoded the payment amount on the check ($30 check encoded instead for $300), causing everything to bounce back. Eventually, Shell gratiously fixed the problem, apologized and provided a letter to me to explain to my CU their mistake. My CU rescinded the charges.

Posted by: Anonymous | May 2, 2006 2:10 PM

To the commentors out there concerned about my previous statement about opening new cards and the effect on my credit card, i have to say one thing. My FICO is 738, and the secret is that I never close the old accounts. By closing your older accounts, it brings your average age of open accounts down. Just pay off the balance, let it sit, and occasionally ask for a credit increase, that way your debt to available revolving credit stays high and your FICO score goes up, up up!

Posted by: Tyson Lewis | May 2, 2006 4:25 PM

I haven't read all the postings on here, but I doubt that this point has been brought up.

The Banks regularly lend more money than they have deposited. If everyone were to go to the bank today and ask for their money the bank would collapse. Now, if a honest mistake is made the customer gets charged fees that often are in excess of the amount taken out. There should be a cap on fees (tied to a fair interest rate calculation perhaps). I know the bankers can do math, so this shouldn't be a problem. The fact is that the Bankers choose to perform unethical practices! I am only 29 and cannot remember an age when banks still cared about their customers, but I wish we could return to that age.

Posted by: Whocares | May 31, 2006 10:57 AM

When people start using terms like "common knowledge" (re: It's common knowledge that cash advance APR's are higher than your regular APR), then we know the conversation is totally illegitamate. This poster, and others who think this way, are totally ignoring the fact that financial education, which all is born from the quality of your overall education, varies widely from location, economic status, and other factors. I think they need to start admitting that the only people who share this common knowledge are wealthy in the first place - ie wealthy enough to obtain a quality education teaching them big words and how to read!

My 18-year-old brother still doesn't understand percentages. Not all people are equal in regards to intelligence, but just because you are a little slower than another, does that mean you should be penalized? That you should never develop the means to buy a house and have a mortgage?

Posted by: Emily | August 4, 2006 2:12 PM

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