Many banks actively encourage their clients with low balances to open accounts. This means that if the client issues a check or uses her debit card and has insufficient funds in the account, the bank clears the check by granting a temporary overdraft (a short-term loan), up a specific limit. The customer is saved from the problems of bounced checks or interrupted shopping sprees.
Sounds like a good deal for customers, right? This is what the banks say. They claim overdrafts are a convenience for customers.
The truth is, they are often a very bad deal for customers. Here is why.
When a bank grants a regular line of credit, interest costs can go up to say 20% or more. However, for overdrafts, banks do not charge interest - they charge a fee on each transaction. This tax does not depend on the value of the transaction.
Let's see how it works. Fresh plans can be found as high as $ 35 per check. We will assume a more conservative fee of $ 20 per check. If you have four checks totaling $ 200 that have insufficient funds against them and the bank automatically activates the overdraft and clears those checks, you have $ 80 in overdraft fees.
Unlike revolving lines of credit that you can repay at your convenience, an overdraft must be paid within days. Let's say the bank allows you to run the overdraft for 14 days.
A $ 200 loan for 14 days to pay fees of $ 80 translates into an annual percentage rate (APR) of 1043%!
A "convenience" for customers? Not at these rates.
What does that sound? It reminds me of payday loans and cash advances. These are other forms of loans that charge you these exorbitant APR. In fact, if you choose to repay a cash advance to maturity and not to drive, you'll likely be charged far less than what banks charge you for an overdraft.
It gets even worse. Banks have a program that ensures that your checks worth more and debits are processed first. There may be some logic to this. However, this also means that when there are insufficient funds in your account, instead of paying an overdraft fee on a big check, you pay the fee of several to several smaller checks!
Moreover, most customers do not even realize they are exposed until the bank informs about it.
Consumer advocates say banks are well aware that many people just do it from payroll to. These customers typically have very low balances. Rather than offer a service that would be in their interests, banks extract high fees from them to cover the checks.
If you are caught short between paychecks, consider arranging funds from other sources, rather than turn to overdraft protection. The best solution to the problem is to systematically establish cash balances so that you do not face such a situation first.
Source: http://EzineArticles.com/8143
Sounds like a good deal for customers, right? This is what the banks say. They claim overdrafts are a convenience for customers.
The truth is, they are often a very bad deal for customers. Here is why.
When a bank grants a regular line of credit, interest costs can go up to say 20% or more. However, for overdrafts, banks do not charge interest - they charge a fee on each transaction. This tax does not depend on the value of the transaction.
Let's see how it works. Fresh plans can be found as high as $ 35 per check. We will assume a more conservative fee of $ 20 per check. If you have four checks totaling $ 200 that have insufficient funds against them and the bank automatically activates the overdraft and clears those checks, you have $ 80 in overdraft fees.
Unlike revolving lines of credit that you can repay at your convenience, an overdraft must be paid within days. Let's say the bank allows you to run the overdraft for 14 days.
A $ 200 loan for 14 days to pay fees of $ 80 translates into an annual percentage rate (APR) of 1043%!
A "convenience" for customers? Not at these rates.
What does that sound? It reminds me of payday loans and cash advances. These are other forms of loans that charge you these exorbitant APR. In fact, if you choose to repay a cash advance to maturity and not to drive, you'll likely be charged far less than what banks charge you for an overdraft.
It gets even worse. Banks have a program that ensures that your checks worth more and debits are processed first. There may be some logic to this. However, this also means that when there are insufficient funds in your account, instead of paying an overdraft fee on a big check, you pay the fee of several to several smaller checks!
Moreover, most customers do not even realize they are exposed until the bank informs about it.
Consumer advocates say banks are well aware that many people just do it from payroll to. These customers typically have very low balances. Rather than offer a service that would be in their interests, banks extract high fees from them to cover the checks.
If you are caught short between paychecks, consider arranging funds from other sources, rather than turn to overdraft protection. The best solution to the problem is to systematically establish cash balances so that you do not face such a situation first.
Source: http://EzineArticles.com/8143
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