According to a recent report from Pew Charitable Trusts, bank customers who use overdraft programs to bridge the gap when they are short on cash are really just getting caught in a trap of high cost credit.
Of course, overdrafts on checking accounts occur when a customer spends more than is available in their account. Many overdraft protection programs allow the charge to go through, but the consumer can pay up to $35 bucks per overdraft.
Not a bad deal for the banks, as it is estimated that consumers pay roughly $17 billion a year in overdraft fees. However, strapped consumers who are saddled with these additional costs only get further behind.
To protect banking customers from accumulating fees, consumer advocates recommend against agreeing to overdraft fees in the first place. If you do not opt in, your purchase on your debit card or withdraws from an ATM machine will simply be declined if there are not enough funds and no fee will be charged.
For consumers who have already opted in to an overdraft protection program, they can just as easily opt out. However, if a consumer wants to keep overdraft protection, it is wise to set up account alerts notifying consumers by text or email that funds are running low to prevent overspending.
It is important to note that overdraft fees for checks and some recurring debit transactions or electronic payments are not negotiable. In other words, banks do not need your permission to charge a fee if you bounce a check so be aware of just exactly ‘what you are and are not opting out of’.
Although some consumers do not realize they can opt out of overdraft fees, some may find themselves in the position of having to accept a hefty overdraft fee in order to purchase basic necessities until their next payday rolls around. This high cost credit is not dissimilar from payday loans, which also end up costing consumers financial resources that could be put to better use.
In recognition of the problem, some banks are considering lower-cost, small installment loans capped to 5 percent of a borrowers paycheck as an option. While they are open to making such loans, guidelines from regulators to make it happen have yet to catch up. In the meantime, the best advice is for consumers to take the time to understand what they are agreeing to in order to avoid making a difficult financial situation even worse.
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