The Overdraft Fee on your Bank Checking Account just Packed it Up
The banks are going to meet their come-uppance all the rest of this year, as President Obama’s consumer-friendly laws begin to put the screws in on all the financial service providers in our lives. But why did the Bank of America, give in and yield voluntarily in an area every bank cherishes as a way of dipping into your account – overdraft fees. The bank just announced in March that it was doing away with it. It used to be that if you used your debit card when you shopped for something, and you didn’t have enough money in your bank checking account, they would let you buy it anyway, and then charge you punishing overdraft fees. Now, if you try to buy something without enough money or account, you’ll just be turned down, that’s all. This must not be good news for the Bank of America at all – 60% of all their overdraft fees came out of debit cards. And that bank is the nation’s largest debit card issuer. This is going to shave millions of dollars off its bottom line, and it’s to do the same for other banks too that will have to match these terms to stay competitive.
You can still have an overdraft facility on your bank checking account if you choose; but it will be opt-in. If you happen to be at an ATM or a store checkout, and you’re being billed for more than you have, the machine will tell you that you can proceed, but at penalty of $35 in overdraft fees. And you can still have your overdraft facility for checks or bills, for a fee. Basically, banks made $35, sometimes more, in fees, if you went over even two dollars more than you had. This is excellent business for them – if they put out money on a formal loan, they wouldn’t make $35 off $2, now would they? The banking industry last year alone made something like $25 billion on overdraft fees at ATMs and checkouts. This new practice is certainly going to hit them hard when it comes into effect on July 1. You know it hurts them, because they’re advertising so hard to get you to opt in for their overdraft services.
So are they really such villains at the banks? Let’s look at both sides of the story. I once worked for a bank about two years ago, and I left because it made me feel bad the kind of practices I went along with working for them. For instance, let’s say that a customer has $100 in her bank checking account. She first uses her debit card to spend $10 at Burger King, she then spends $50 to pay her cell phone bill, and then she spends $102 on gas for her car. That means that with the first two purchases, she was completely within her limits, and she should be charged a penalty only for the last purchase. What they’ll do at the bank though, is, they will charge her the $102 for gas first, so that it wipes out her account, they’ll charge her penalty for it, and then they’ll record the other two smaller expenses. That way, they get to charge for $35 penalties three times instead of just once, if they did it the right way.
But in their defense, the banks argue that they’ve been pushed to such unfair extremes in their industry. Over the years their has been penalized by punishing consumer oriented laws. They say they’ve been taxed and regulated to death for decades, and they have no choice but to do what they can to claw their way back into profitability. Certainly, these practices are unfair; but they say that most of their rules are only to apply to people who overdraw. The simple way to avoid most of their unfair practices they argue, is to simply live within your means.
Pros and Cons for a Checking Bank Account
A typical banking or even online banking service is to offer free checking to clients. This is an important part of a decision to sign on with a bank, as a checking bank account that eliminates or reduces fees can help save you a significant amount of money each month. A high interest savings account is quite hard to find nowadays, and so any money that accumulates over the month is going to be small. This means that if you have a high number of transactions that come with fees, you could actually be losing money each month.
Why do banks offer free, no-charge checking? It’s part of their top banking sales pitch. You are more likely to be interested in signing up with a bank that offers you something free, especially if it will reduce the service charges that most of us want to avoid. Once the bank has a client, then they can make recommendations and promote different services and money management programs that they have to offer, which is largely where the bulk of a financial institution’s money is made.
But what does free checking actually mean? Usually, it involves maintaining a certain amount of money in a checking bank account. As long as the amount never dips below the assigned level, then you receive a variety of benefits. These benefits usually involve free checks, hence the name, as well as exemption from service fees from a variety of other transactions, including PC banking. Free use of an ATM debit card, free checks, unlimited transactions and other reductions in costs are typical terms that go with a free, no-charge checking bank account.
So what is the downside, you may ask? As mentioned, you usually need to maintain a certain amount of money in the account in order to continue to receive free, no-charge checking. If you need to dip into that account, then service charges will start popping up. Also, a checking bank account usually does not earn any interest, which is the tradeoff for the absence of service fees. Since a high interest savings account is a rarity these days, this may not be an issue.
If you are good at managing your money, and can afford to have a portion of your money set aside for the long term, then a free checking bank account may be the best solution. This is especially true if you tend to accumulate a lot of transactions in the month. If not, then you may be better off paying as you go, but it’s best to check with a bank employee about your options before making any decisions.
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