We write so few checks today. Instead we tap our phones, or we use cash apps or debit cards. We set up automatic payments for regular bills directly from our banks. All this convenience makes it hard to keep track of how much money is actually in our checking accounts.
And when we don’t keep track of how much is in our checking accounts, we often end up being overdrawn. Then we get hit with a slew of fees.
A vast majority of overdraft fees are charged on debit transactions. Most of those are charged to people who live paycheck to paycheck. Young people are especially prone to overspend on their debit cards.
When our son was in college about twenty years ago, he had an incident where he deposited his paycheck. Then he wrote his rent check. Then he went to a conference in California with a college group. The bank didn’t process his deposit because the law gave them two days to post that amount to his account. In one day his rent check was paid, along with a debit card purchase at an airport restaurant, a baggage fee, another debit purchase at a shop, and an ATM withdrawal for $20. His ATM receipt still showed he had plenty of money in the account. Then the bank sorted the transactions so the rent came out first. That allowed them to charge him $150 in fees, $30 for each overdraft.
I heard plenty of similar stories from my students at Alliance High School. Every bank was playing this game.
In 2010, the Federal Reserve Board created opt-in rules for ATMs and point-of-sale transactions. This meant that when people used their debit cards, their payment or ATM withdrawal would be rejected if there wasn’t enough money in their account to cover the transaction.
For debit card transactions at ATMs or at merchants, consumers must opt-in, or agree up front, that the bank can charge you an overdraft fee for any debit card transaction that overdraws the account. If you don’t opt-in, you can’t be charged a fee, but the bank refuses to pay. The merchant’s cash register tells them the payment has been declined.
If you do opt-in for overdraft protection or coverage, then your bank may pay a debit card purchase or ATM transaction, even if the transaction overdraws your account. You will be charged any overdraft fees that are incurred as a result. The opt-in form should be provided by your bank with the other paperwork you are given when you open an account.
Banks immediately got on the phone to customers, asking them to opt in to overdraft protection. That way customers could avoid the embarrassment of having a payment rejected. I informed the caller that I was one of the people who had lobbied Congress for legislation saying that debit card transactions should not be honored if there wasn’t enough money in the person’s account. Banks were abusing young people who didn’t have much experience managing money and people who live paycheck to paycheck. Click.
Remember that if you make a $20 ATM withdrawal, or use your card for a small payment, you might be charged a $35 overdraft fee, making that small amount of money really expensive.
Banks are not required to obtain your opt-in for Non-Sufficient Fund (NSF) fees on other types of transactions. Opt-in only applies to debit cards – purchases or ATM withdrawals. Payment apps work like debit cards, so they follow the same rules.
How can you avoid paying overdraft fees on debit transactions? First, go to your bank and opt out of overdraft protection on debit cards! This has been so profitable for banks that they will discourage you from making that change.
Use prepaid debit cards, where you pay money onto the card upfront, instead of ones linked directly to your account. You’ll find out when the card is out of funds, and you will have to reload it.
Use your debit card wisely! Avoid paying those overdraft fees.