Protection from writing hot checks is as profitable as payday loans

Banking is a lot more complicated than it used to be. In days gone by, you had a free checking account, and it was understood that the bank made money using your money in exchange for the service provided. Those days are gone, and today it’s hard to find a bank account that doesn’t include a lot of monthly fees. Some banks charge you for the “convenience” of paying online. Others charge a fee for the “convenience” of actually talking to a teller. People are tired of paying fees for things that used to be considered part of the basic service, so banks are responding with offering additional services.

One service that most banks offer today that is advertised as a perk is automatic overdraft protection. This service is described as one which will “protect” you in the event that you should accidentally write a check for which there are insufficient funds. In the past, such a check would be returned to you, along with fees from your bank and from the party to whom you wrote the check. Automatic overdraft protection is designed to protect you from that, and most accounts will allow you to overdraw your account for anywhere from $100-300 more than you actually have.

The product might be offered as “protection’ but it really isn’t. There is a fee for this service, and on average, it runs about $29 per incident. Those incidents, at $29 apiece, added up to some $10 billion in overdraft charges last year alone. The banks are offering the product for your protection, but they are actually offering it to shore up their bottom line. Overdrafts are profitable and they aren’t protection - they are high interest, short term loans.

The product doesn’t just kick in when you write a bad check. The overdraft plans will generally allow you to overdraw your account when you are using a debit card at a store. They will also allow you to overdraw when using an automatic teller machine. In many cases, you will not be told that you are about to overdraw your account. If such were the case, many people might think twice about using their debt card or taking cash from an ATM. Who would take $20 from an ATM if they knew that it came with a $29 fee? No reasonable person would, but thousands of people do it every day because they simply don’t know they are about to be overdrawn.

Overdraft protection is certainly a nice feature if you should accidentally write a bad check. Sooner or later, it happens to everyone, as mistakes happen. But banks don’t offer this service to cover your mistakes. They offer this service because they hope and expect that you will use it frequently. And if you do, it will cost you $29 each and every time.

That’s not really protection; they are expensive short term loans. And that being the case, banks should be more upfront about it.

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