Question

What is an overdraft? Why is it important to avoid overdrafts?

What is the average overdraft fee?

Why should you keep a checkbook register?

Answer 1

Overdraft protection was designed to be a customer friendly service that kept the customer from suffering the momentary embarrassment of a bounced check or declined debit card transaction. Banks would allow customers to spend money that they did not have for a small fee called an overdraft fee. An overdraft fee is a fee charged by a bank when a purchase or withdrawal exceeds the available balance on the account. Overdraft fees used to be relatively minor but today they have become big business for banks. Banks absolutely love overdraft fees. They derive a significant amount of their income from overdraft fees. The U.S. banking industry collected almost 40 billion dollars in overdraft fees in 2009. Overdraft fees are collected on checking accounts and credit cards.  Banks will approve a transaction that will put a customer over their account limit and then hit the customer with an extra charge. Every subsequent transaction is hit with an additional fee until the account balance is brought up-to-date. While overdraft fees are a bank’s best friend, they are often a customer’s worst nightmare.Overdraft fees are incurred when you spend more money than you have available in your bank account, and banks typically charge around $35 per instance, meaning that you can be charged multiple overdraft fees in a single day. You can overdraw your account by writing checks, swiping debit cards, withdrawing cash at ATMs and setting up automatic debit card or ACH payments. When these many modes of spending draw money from a single account, you can quickly lose track of your balance and end up facing an annoying and even dangerous amount of fees.