Paying an overdraft fee on your checking account is like having your mouth washed out with soap: The bank says it's for your own good-but is it really? Just ask Ben Kohler, a 19-year-old Pizza Hut manager who's paying his way through school at Wright State University, in Dayton, Ohio. Kohler has paid hundreds of dollars in overdraft fees. "How do I keep that stupid fee away?" he wonders.
That "stupid fee," which began appearing on account statements about five years ago, is designed to be a convenience and a penalty, banks say. Before overdraft fees, banks and credit unions denied transactions when the account holder didn't have enough money and charged the customer a one-time fee for insufficient funds. Now, a debit or check transaction that exceeds your balance will clear, but the bank charges as much as $35 in addition to the amount you owe for the transaction. And you can end up paying multiple fees if you're not aware that you have a negative balance. Some banks levy additional charges for each day you're in the red.
Overdraft fees "are meant as a deterrent to making payments or writing checks for more than is in your account," says John Hall, of the American Bankers Association. (What's left unsaid, of course, is that the fees go straight to your bank's bottom line.)
In 2006, consumers paid an estimated $17.5 billion in overdraft fees, according to the Center for Responsible Lending. Consumer groups, which consider the charges usurious short-term loans, want Congress to require banks to get written consent from customers before they are enrolled in accounts that charge overdraft fees and to disclose the fees in terms of an annual percentage rate.
In the meantime, you can avoid the fees by keeping close tabs on your account or using a bank or credit union that doesn't charge them. Unfortunately, the ten largest U.S. banks all levy overdraft fees. But many smaller banks and credit unions don't-just be aware that your debit card will be denied or your check will bounce if you don't have enough money in your account. And you'll still be charged a one-time fee of as much as $35.
Don't be shy about asking your bank to waive its overdraft charge. Banks are willing to do so for good customers who make an occasional mistake.
If you want a safety net, you can link your checking account to a savings account or line of credit. A line of credit typically charges an annual interest rate of 18%, says Leslie Parrish, of the Center for Responsible Lending, but that's cheaper than paying overdraft fees. Banks usually charge $5 to $10 to transfer money from your savings to your checking account.