Your Degree of Control Over a Bank Overdraft

Bank overdrafts occur whenever you execute a debit, check or credit card transaction that is tied to a checking account with an insufficient balance to cover the transaction amount. When an overdraft occurs, it is usually rejected immediately by the bank.

However, if you are enrolled in an overdraft protection program (and most people are nowadays, due to automatic enrollment programs upon account signup), your bank or credit union will cover the overdraft amount by paying the merchant or individual to whom the charge was made. At the same time, your financial institution will charge you a fee for the service. These overdraft fees can add up quickly. At $25 to $35 per charge, just two overdrafts can add up to $50 or more in fees in a single day.

When asked, most casual observers would say that the banking customer who has overdrawn their account should be held accountable for any fees they have to pay. After all, the overdraft is their fault, right? Of course, technically this is correct, provided the person has been adequately informed of the fees. However, if you dig a bit deeper, the reality is a bit murkier, given these facts:

1. Many banks admittedly practice something called transaction stacking, whereby they will process larger transactions made in a given day before processing the smaller ones, thereby increasing the chances of overdrawing the account with more transactions and thus more fees being incurred. In other words, these banks (including many national chains) are literally gaming the system to try to increase their fee-based income. This makes sense, given that overdraft fees are a $25 billion per year business for banks.
2. Banks’ online statements are often confusing to read and understand, such that it can require you to manually track and make back-of-the-envelope calculations to determine the actual balance of the account at any given time. Even though it shows a positive balance on your statement, there are often a number of things in the background (e.g., un-cashed checks, pending credit card transactions, etc.) that are about to make your balance run low – or into the red – when you are not looking.

Once an overdraft has occurred, you will see a charge appear on your account. Again, this charge may be $20, $30, or even $35. This adds insult to injury, since you’re already in the red and now are responsible for paying the bank more fees just to get yourself back in black.

So, what is your degree of control over a bank overdraft? Here are some possible courses of action for you to follow:

1. Call the bank to complain. This may or may not get you anywhere, but it is worth a shot, especially if you are a new customer to the bank or if this is your first overdraft in a long time. Stop short of threatening to close your account due to the overdraft fee (unless you really mean it – since they may call your bluff). But, let them know you are unhappy and see if they will remove the fee.
2. Write the bank’s customer service department and request a refund of your overdraft fee if you suspect an error or deceptive bank practice led to the overdraft.
3. The most drastic course of action: leave your bank and switch your checking account to one that promises to never charge you an overdraft fee. For more on this option, see: http://www.escape-overdraft-fees.com/.

Online banking shouldn’t have to be expensive, especially if you are generally a responsible banking customer who occasionally makes a few banking mistakes but doesn’t want to pay through the nose to atone for your banking sins. Know your degree of control over a bank overdraft and take the necessary steps to get a refund or switch to a no-overdraft-fee bank.