I had to reread the first couple of paragraphs of the story to make sure I had read them correctly. Sure enough, the Wall Street Journal article said that a surprisingly high 75 percent of people have opted in for overdraft protection coverage from their bank or credit union.
In effect, such people have chosen the freedom to spend more than what’s in their checking account in exchange for a fee.
What Is Overdraft Protection?
Depending on your bank or credit union, overdraft protection usually kicks in when you try to buy something or pay a bill using your checking account and you don’t have enough money in the account to cover the cost. It also may go into effect if you try to make an ATM withdrawal and you don’t have a sufficient balance.
If you have overdraft protection, your bank or credit union will approve the transaction and then charge you a fee as high as $34. If you don’t have overdraft protection, your transaction will be denied and you will not incur a fee.
The Choice is Now Up to You
New regulations that went into effect earlier this year now require banks and credit unions to ask their customers whether they want to opt in for overdraft protection. Previously, many financial institutions simply let people overspend their accounts and then charged them a fee. It became a very lucrative source of revenue.
In 2009, overdraft protection fees totaled over $37 billion, according to the economic research firm Moebs Services. Earlier this year, Moebs estimated that the new opt in requirement would drive such fee revenue down by about $2 billion. However, now that the company has seen how many people have opted in for overdraft protection, it has changed its outlook, predicting that overdraft protection fee revenue will grow to $39 billion in 2011.
Do People Really Know What They’re Choosing?
According to the Wall Street Journal, most of those who have opted in for the service have done so “rather than face the embarrassment of being declined a purchase.” But I wonder if that tells the full story.
I’m guessing that some people may have misunderstood the use of the word “protection” in the name of the service, believing they were signing up for something that would be to their financial advantage. To be fair, some probably may, in fact, want to “protect” against not having enough money in their account to cover an automated bill payment, such as a mortgage payment. Missing that payment could make them liable for fees that are higher than what their bank or credit union charges. Still, there are better options.
Just Say “No”
Of course, the best alternative to overdraft protection is knowledge: know how much money is in your account and don’t spend more than that. If you insist on having overdraft protection, do you have a savings account at the same bank or credit union where you have your checking account? If so, you may be able to link the two accounts, automatically drawing funds from your savings account to cover any overspending you may do with your checking account. In some cases, there is no fee for such a service. Or, if there is a fee, it will typically be less than the traditional overdraft protection fee.
Bottom line? Your finances will be better protected if you keep close tabs on your checking account balance and opt out of overdraft protection. By doing so, you will be opting in for overspending protection.
Did you choose overdraft protection for your checking account? Why or why not? Please leave a comment below.
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