Banking Basics: Overdraft Fees
Back in the day before computers and cellphones permeated the culture, consumers had a limited amount of ways to pay for goods and services. Cash was king and if you didn’t like to carry that, then you could use a check or if you were qualified, you carried a credit card. Now especially with COVID worries, many businesses prefer the ease of card payments—debit or credit. The debit card has become extremely popular due to the fact that it allows you to pull from your own funds like a check, but it is instant like a credit card. The problem with this instant gratification is that people do not always keep up with their finances like they would when they were balancing their checkbooks. Consumers can get caught up in a sea of smaller transactions and end up spending more than they have—this leads to overdrafts and the fees that follow. What can you do about overdraft fees and is bankruptcy a good option for you?
How Do Banks Deal with Overdrafts?
When you set up a new bank account, there are two main ways that banks will allow you to deal with over spending on your account. You may have the option of setting up or linking another account that will act as a safety net in case you overuse your debit card. The amounts will come from the secondary account to cover any negative balance. This usually does not carry a fee if they have to transfer the money from an approved account. Sometimes, the bank will offer a credit line as an overdraft account. These are similar in that they will stop overdrafts, but as this not your money, you will have to pay it back.
If you do not have an overdraft account, then the bank will charge you an overdraft fee. These are big money makers for your bank. They are similar to check return fees. The difference lies in the timeline and the outcome. With a check, the bank has to manually process the amount and if there are not enough funds, the check will bounce and the transaction would not be accepted. With debit cards, the transaction will go through unless you have it set up for the card to be declined when you do not have enough funds. For each purchase that goes through when you do not have the money in your account, you will be charged an overdraft fee. Those can definitely add up if you are out shopping and aren’t paying attention to your spending.
How Do Banks Get Away with This?
The short answer is in the small print. When you open an account with a bank, there are a lot of terms and conditions that you tend to gloss over because the paperwork can be so overwhelming and not everyone knows to ask questions. This especially affects low-income customers who have to actively watch their balances. And the banks don’t always make it easier. More often, they will try predatory tactics that will help them charge consumers more and more fees. How? Banks tend to process more expensive transactions first. So if you have several pending debits, they will take out the larger ones first in order to try and make sure that more purchases cause you to overdraft your account and they can charge multiple fees. Infamously, Wells Fargo used the overdraft fee system to such a degree that they were over penalizing customers and charging them thousands of dollars in fees over the course of a year. The federal government finally stepped in, but the damage was done.
How Can I Protect Myself?
Balancing your virtual checkbook is just not as easy as it was when you had to write in a tangible register. Most people only used checks on larger purchases and so the checkbook had fewer entries. With the ease of a debit card, you have to keep track of lots of minor transactions in addition to your bigger bills. If you are having trouble with finances, make it a point to check your balance online often and remember to deduct any pending amounts so you do not run the risk of spending too much. Another good thing to do is to limit minor purchases through your bank card. It is very tempting to swipe that card for everything, but try and carry a bit of cash to cover that fast food purchase or smaller shopping trips. But don’t be too hard on yourself if you have to use your card—cash is not a viable option for everyone. One other thing that may help is to create a budget. Cutting out small spending sprees and setting a calendar for meals can mean that you can make your money go further.
What Can I Do If I Am Already Drowning in Debt?
Is your negative balance weighing you down and you feel like you can never come up for air? If you are struggling with debt and riddled with late/overdraft fees, we may be able to help you down the road to financial freedom. Bankruptcy can be a daunting option and is not for everyone. Why not give Lam Law Firm a call today at 843-839-9995 to set up your free initial bankruptcy consultation and speak with our experienced attorney? Take charge of your finances and get your fresh start.