Why overdraft charges are okay (but unecessary)


Overdraft charges are the great irony of banking. You get charged a fee when you try to make a purchase and you don’t have sufficient money in your account. It would almost be a joke if it weren’t so humorless.

Nonetheless, I can’t say that I’m against them.

Getting over-drafty in here?

Overdraft fees in the United States amounted to $32 billion in 2013. At a guess of 200 million people who could have a checking account, that’s a share of $160 per person (and someone is taking my share). Moreover, the average overdraft fee charged by banks is around $30.

Bank of America, a bank for which I happen to have the information offhand, interestingly gives you two options: they can either charge you $35 and decline the charge or charge you $35 and approve the charge. I guess this option is designed to eliminate the psychic distress of having a transaction declined, but still puts the user deeper into the red, ensuring that a future charge will likely incur more fees.

Here’s another statistic, found on a study discussed by Bankrate.com:

“[S]omeone who overdraws their account at the ATM by $20, and is charged the median overdraft fee of $27, would incur an annual percentage rate of 3520 percent if they repaid the loan in two weeks.” (emphasis mine)

Personally, I’ll take the psychic distress.

Overdraft is not the problem

Let me be clear, I actually have no problem with banks charging $30 or more for an overdraft. I do take issue with how banks can manipulate how transactions are cleared so as to maximize the chances of overdraft, but it’s not like this is a secret practice. By asking to use money that you don’t have, you are in a way lying to the bank. And that’s not something that we as Unlikely Radicals do.

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Luckily, you and everyone else can avoid overdraft fees completely. Here’s how:

  • Keep track of your expenses. Uncover the secret life of your money, and you will make sure that none of it gets away from you. If you know what your income, bills, and expenses are, and you stick to them, there will be no uncertainty.
  • Have a sufficient amount of float in your account. I’ve talked about float before. Float insures that you always have enough to cover your bills and expenses throughout the month. If you figure out how much float you need, and stick to a plan, it is impossible to go over budget.
  • Have an emergency fund. You can plan for all your expected bills and expenses, but what about all of your unexpected bills and expenses? For those, an emergency fund is necessary. Even just having a little bit of money (say $100) stocked away can guard against small emergencies. For the known unknowns (such as car repairs), a separate sinking fund will perform the same function; keeping you from running the risk of running out of money. When a bill comes due, you can transfer the money from the sinking/emergency fund into your checking account, and you’re good to go.
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All of these ideas fall under one overarching heading: Don’t be avoidant. You can say that avoiding the topic of taking care of your money is “freeing”, but it’s actually not. You still “feel” things that you are avoiding. It feels like a weight, a heaviness inside. (If you’re not used to it, know that your body is telling you things that you ought to listen to.)

Not keeping track of things will cost you. And the overdraft charge is a fee for the distracted and avoidant. But you never have to pay the charges, so it shouldn’t matter. And yes, I know this is hard. But which would you rather do, take ownership of your situation, or pay 3520 percent interest? I know what I’d pick.

But enough about me. How do you feel about bank overdraft charges? What do you do to avoid them?

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