What the heck are Overdraft Fees & “NSF” on my bank statement?

October 21st, 2009. By Kristine B

There’s no shortage of financial news in the headlines lately, but the thing that might impact you the most is news about bank overdraft fees. So, that’s what we’re covering today in Pleading Ignorance. 

So, What Is an Overdraft Fee? 

Let’s back up first and answer what Overdraft Protection is. Banks either include or offer Overdraft Protection on their checking accounts to let you buy something with a check—or on your debit card—even if you don’t have enough money in your account to cover the transaction.

Ain’t that sweet? 

So let’s say you’re at the cash register trying to buy a coffee and a muffin for $4.00 with your debit card. But, you only have $3.50 in your account. Without overdraft protection, the bank would decline the transaction and you would probably suffer some momentary embarrassment. With overdraft protection, the transaction goes through and you can carry on with your life without any embarrassment about “Insufficient Funds.” (Oh, that “NSF”–that’s what it stands for: Insufficient Funds.)

Sounds good, right? Except that the $0.50 cents the bank has covered you for isn’t free. And the bank might not have told you that you were given Overdraft Protection and would be charged for it.

And guess what—the fee the bank charges you for covering that $0.50 cents is…drum roll please…an Overdraft Fee.

The thing about Overdraft Protection is that banks charge fees for overdraft transactions—the transactions that require more cash than you’ve got on hand—and those fees are high. Up to $35 per overdraft transaction (gulp). So, that $4.00 coffee and muffin suddenly becomes a $39 coffee and muffin. Can you afford a $39 breakfast snack, cause I know I sure can’t. In fact, I don’t know of anyone who would willingly pay $39 for a cuppa joe and a chocolate chip muffin.

Not all the banks charge $35 per overdraft transaction. Some charge on a scale, you know…$10 for the first overdraft transaction, $20 for each overdraft transaction in a month over 5 transactions. You get the picture. The point is that you’re being charged a lot of money for what might otherwise be a few dollars and cents.

So, you say, why not just make sure you’re never in overdraft? Well, that’s the catch to the whole situation.

The Overdraft Fee Catch…because There’s ALWAYS a Catch

The banks—you know, those lovely, large institutions that say they allow overdraft protection to help customers avoid the shame of having a transaction denied—have been accused of selectively reordering transactions to “help” consumers go into overdraft. Aren’t they nice? They provide you with the trap and then ease you gently into it.

Here’s how it works (using easy math, because it’s early in the week and my brain isn’t at full power yet):

Let’s say you have $100 in your account. Good for you. Then, you deposit $200 into your account. So, you believe you have $300 in your account (a nice little sum to go do some spending with). Except, the bank doesn’t process that transaction right away. And off you go shopping.

So, thinking you have $300 in your account, you start spending. To make it easy, you make purchases in the following amounts—and in this order: $20, $30, $50 and $150 (I know it rarely happens like that, but go easy on me, okay?) You’ve spent a total of $250 but you think you’re okay because you’ve got $300 to your name.

Nope. Because the bank didn’t process that $200 deposit you made! So you really only have $100 to spend. You’re going into overdraft, my friend. But, because of the order you spent money, the first three transactions ($20, $30 and $50) should be fine. That equals $100 and you have that in your account at least. Only one transaction should be in overdraft—not ideal, but manageable, at least.

You are far too trusting, my friend. Those generous banks often process the highest transaction first—$150. But, you don’t have $150, you have $100. So, the very first transaction the bank processes pushes you into overdraft. Then, they charge you $35 (or whatever amount) for EVERY overdraft transaction. Bottom line? You’re paying for four $35 overdraft transaction fees (a whopping total of $140 in fees) when you had no idea you were even close to overdraft to begin with!

Sneaky, no? And there is no way for you to protect yourself from it. Why? Because the bank didn’t ask you first if you wanted overdraft protection. It just gave you protection automatically. Aw c’mon…they were just looking out for you, right?

And now for the real Overdraft Fee Kicker…

Now, here’s the kicker. Here’s the really fun, knee you in the stomach, laugh til you can’t laugh no more, kicker. The banks say that they charge high overdraft fees to discourage people from going into overdraft. (I’ll pause to allow you some time to kill yourself laughing at that one.)

Know what else discourages people from using overdraft? Not offering it. And definitely not offering it automatically, without telling consumers that they are enrolled in it and also not telling them about the fees they’ll pay for using it.

Once again the banks want us to believe that they have our best interests at heart. With friends like that, who needs enemies?

Tags: Overdraft fees, Pleading Ignorance

This was posted on Wednesday, October 21st, 2009 at 4:45 pm and is filed under Emerging Issues, Financial, Pleading Ignorance . Feel free to respond, or trackback. Read our comments policy.