Overdraft protection sounds like a program that would, I don’t know, protect you? Instead it helps lessen the fees but still gives banks the opportunity to charge you $10 to $12 (if not more) for transferring your money to cover an overdraft.
Understand what you’re up against
When I worked in banking, we would look at certain warning signals. If a product is excessively complex and extracts revenue that is exponentially higher than the cost of providing the service, then something is wrong.
I believe the overdraft market in the US is fundamentally broken, and has morphed into the worst type of predatory lending.
I have a really simple solution, and banks all over the world are already doing this.
Declining a transaction costs banks fractions of a cent, so charging consumers a $35 decline fee is obscene. The most they should charge is a few dollars. Some new entrants charge nothing at all – and they are right to do so.
An overdraft is a short-term loan. Lets stop talking about fees, and start talking about interest rates
Checking accounts should have a disclosed overdraft limit. In other words, you should know that you can go up to $500 overdraft
The bank should charge a fair interest rate for the money you borrow – and only for the days that you borrow the money
Some banks are reasonable when it comes to overdraft
First Direct, one of the most popular banks in the UK, offers the following:
Free overdraft protection up to $250
A line of credit above $250 (the better your credit score, the higher the available line). The interest rate is about 15%. You don’t pay a fee-only interest for the days that you use the credit line. So, if you borrow $100 for 7 days, you would pay about $0.29.
If you use your entire overdraft line, and the bank declines additional transaction, you pay nothing.
Banks should make money. This is not a charity. But they should offer transparent pricing that is easy to understand and compare. And the profit should be in line with the cost of providing the service.
Consumers should be able to compare and choose the best option – just like any other consumer product. Fortunately, we’re helping you do just that.
Banks that respect you and your money
Consider switching to an internet-only bank. I have made the switch.
If you have a few instances of going overdraft because of a simple mistake, then consider Ally Bank. You get one of the best interest rates on the market for your savings account. And, if you go overdraft, Ally DOES NOT CHARGE YOU for transferring money from your savings account to your checking account. Why you ask? Because, it doesn’t cost them anything to do it!
If you go overdraft because you need the money, then Capital One 360 might be right for you. This is the old ING Direct. They act a lot like First Direct of the UK: no overdraft transfer fee, a line of credit, and you only pay interest for the days that you are overdraft.
If you never want to go overdraft again – and wish the bank would just decline your transaction and not charge you a fee, then look into Bluebird or Serve (both from Amex). Bluebird is in partnership with Wal-Mart. You can never go overdraft, and you will never be charged an NSF fee.
Even if you love brick-and-mortar bank branches, do the math to see if switching to an internet-only bank could save you a substantial amount of money in fees – and don’t forget the cost of gas!
Want to know more about Internet banking? Check out this article.