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Do You Remember How Overdraft Protection, Overdraft Fees, and Free Checking Used To Work?

posted by Nathalie Martin

Calling everyone in the over-40 set to help me remember something. When dealing with those old-fashioned things called “checks,” how did your own overdraft protection used to work?  My recollection is that, back in the day, as long as a person had a certain level of creditworthiness, the bank used to cover your check in a discretionary manner. Then, as I recall, middle class people were encouraged to set up various protections to keep checks from bouncing, such as automatic transfers from savings or a line of credit to cover overdraft accounts.  Why don’t more people use these? Is it because they do not qualify? I keep hearing about $35 and even $39 overdraft fees, on both debit and check transactions, like in the New York Times blog today, and wondering who is paying them. Apparently lots of people, since the $38 billion in overdraft fees earned by lenders in 2009, is double what lenders made off these fees in 2000. Is this the ultimate example of banking for the “haves” versus the “have-nots?”

I became my own research subject this past week when a large check written to us bounced. Five items were presented for which we had no dough. For the first two, we were changed $3 each to take the necessary funds from our savings account, and for the last fthree, we were charged $5 each to borrow money to cover the checks from our line of credit. Total, $21.00. Neither Stewart nor I remember asking for these “protections.” They apparently just offered these things to us when we opened our account at the credit union 14 years ago.  We saved over $100 by having these protections. Surely, this is very different than the overdraft “protection” that everyone has been complaining about. 

Now I am reading a paper linking higher overdraft fees to increases in free checking. Does this mesh with your own experiences, readers?  I cannot remember ever paying for checking. Have some of you seen increases in free checking while watching these overdraft fees go up?


You've never been the recipient of the $40 Starbucks Latte? If you only have $3 in your account and charge a $4 Latte, you were dinged with a $39 Overdraft fee. If you had multiple checks clear, the banks have a nasty habit of clearing transactions in descending order (largest checks first), then putting in your deposits. So, if you have mortgage check that clears but have $2 left, your subsequent checks will all incur a $39 overdraft fee. If the banks cleared in ascending order, you would only have one $39 for the mortgage checks vs all the other checks that did not clear.

Your post highlights the difference beween good banks and bad banks. A good bank doesn't charge you to make automatic transfers to cover overdrafts. A bad bank does.

It also highlights the difference between a smart consumer and a not-so-smart consumer. A smart consumer doesn't have and doesn't use a debit card. Credit cards offer all the same benefits and more protections. I've never been charged an overdraft fee on a credit card, and I've never paid a dime of interest, because I pay my credit card off every month.

In the late 80s/early 90s I had to pay $20 each time money was transferred from savings to checking to cover overdrafts. This was with First Interstate, now part of Wells Fargo. That was the best deal they offered and it didn't involve credit at all.

Nathalie, two key words in your post: CREDIT UNION.

With the advent of real-time online banking and online bill pay, fewer people engage in that quaint activity we over-40s grew up with: balancing your checkbook. Banks know this, of course, but customer failure to monitor checkbook balance is one of their main defenses when confronted with complaints about their policy of sorting daily debits in descending order of amount for payout, rather than chronological.

As has been noted often in the last few years -- including in a few successful class action suits -- the ordering of processing debits looks suspiciously like a self-serving policy to maximize per-transaction NSF charges. So there's that.

My recollection of checking overdraft protection from 20+ years ago is similar to yours. But I also remember being brought up that bouncing a check was a cardinal sin. I'm not sure that severe attitude obtains today.

Also note that there are two overdraft options floating around out there post-Dodd-Frank -- the "generous" option in which banks will continue to cover all overdrafts, including POS debit card/credit card charges, and you will continue to pay $39 per -- and the "less generous" option that is the new default per Dodd-Frank (and that for some odd reason the banks keep trying to get their customers to change...) in which POS debits are rejected in case of NSF.

Back when banks were acting like banks, you mean. Not like now, where our "banks" are really being fee based "money changers".

The way a debit card is supposed to work is without a "credit" component. If you don't have the money, it's not *supposed* to go through- it only works on the money you actually have!

The idea the bank would loan you the $4 you just charged at Starbucks and charge you $39 for the pleasure, that makes no sense at all.

If the banks would go back to operating like banks again all this would be over. Loaning out their depositors money and making money on the difference.

It was no accident 50 years ago the owner of the local bank was one of the wealthiest guys in town, that slow, conservative way of banking was highly profitable. But that's not enough money for banks today.

Now the money they loan you isn't their money at all, which explains why the credit crisis, if you are loaning someone else's money and there's little chance *you* would lose money, but you get paid on commission for the loans you make, the loans got a little reckless.

And here we are. Reckless banks, bailouts, fees for things like giving you your own money from your own account, that's what they are supposed to *do*.

You give them your money, they store it for you and loan it out until you need it, they pay you some amount of interest for their getting to keep your money. And when you write a check, they clear the check with *your money*.

Banks have always charged fees for overdrafts. Today it's $39 and the bank covers the transaction. In the past the bank would bounce the check and charge you $5-$20, plus the merchant charges another $5-$20 for bouncing a check. Adjusting for inflation, I'm not sure the total charge is really higher. Multiple bounced checks in the past would also result in multiple charges if I remember correctly.

I'd say a major issue today is that people don't balance checking accounts or track their finances (I'm strange, I've always balanced credit cards in addition to checking, along with not using any sort of internet download of transactions). My guess is a large proportion of overdraft fees come from people who use their debit (or credit) card for everything and have no idea how much money they have. Many of them might do better paying cash instead of using a card, it's very clear when you've run out of cash.

These are also the people who will lose from stolen cards or card numbers. I've long thought the smart way to be a credit card number thief is to create a set of duplicate cards and use each once or twice a month for gas or drive-thru food. There's a good chance the extra charges won't be noticed for months or years.

In terms of financial education (and watching my kids), I wish we still had passbook savings accounts. Updating the book, which you brought into the bank for each deposit or withdrawal, at which time it was updated with any interest payment, is very easy to understand. Today's internet savings or once in a blue moon mailed statements don't have the same meaning for kids. Of course, the fact that savings accounts don't pay interest (compared to the 3%-5% older readers grew up with) doesn't help. Convincing a kid to save money to get .25% interest is a hard sell. Though it's amusing to hear bankers telling you how great those rates are.

I've also noticed the market working in terms of overdraft fees. Citibank is now advertising credit cards with no late fees. Contrary to predictions a couple years ago, I haven't seen annual fees added to cards. The scare 5-10 years ago was that credit card minimum payments would go from 2% of the balance to 4%. Instead they went to 1% plus interest, which is well under 2% for those who used the "3.99% until paid off" deals.

Sorry, this has been a bit rambling. Blame the evening glass of wine. As a final note, the following showed up today and fits the subject matter:


Confession Time:

I didn't start balancing my bank accounts, until I got my IOLTA account. Previous to that, I never needed to. I keep a large amount in savings and I have a zero fee line of credit as over draft protection on checking.

I'd just check the online accounts once a week and make transfers as needed; so that, I never ended up paying interest on the credit line. Now I balance all of my accounts, because if I'm doing it for one, I might as well do it for all.

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