Say you are out having dinner with friends when the waiter brings back your debit card, shaking his head and asking if you have some other way to pay.
How embarrassing. What is it worth to avoid the inconvenience of having your transaction declined because your checking account is a bit light?
If you have overdraft protection from your bank you may already know the answer: It isn’t cheap. In a report released this month, the Consumer Financial Protection Bureau found that people enrolled in overdraft protection pay an average of $225 a year in fees for the programs.
The important thing to remember is that there are big differences between banks when it comes to the fees they charge for letting you slide, the consumer watchdog agency discovered.
“What is marketed as overdraft protection can, in some instances, put consumers at greater risk of harm,” CFPB Director Richard Cordray said in remarks announcing the agency’s overdraft report.
At the toughest banks, people got charged nearly $300 in fees a year on average, and were frequently booted out of the checking account for having unpaid overdrafts. More lenient banks rarely closed accounts, and their typical fees were less than half the costs of the top tier.
How do you know which end of the spectrum your bank is on? Ask these four questions and you can tell if an overdraft program is designed as a convenience for you — or a money-making machine for your bank.
1. What’s the cap on fees charged per day?
The large banks surveyed charged a median $34 fee per overdraft, but their policies varied widely. Some banks capped the number of overdraft fees at two in a day, while others allowed up to 12.
2. How about a waiver for small overdrafts?
Most banks will cut you a break for small overdrafts; others slam you for going over by a penny. For banks that provided a waiver, the median threshold was $5, either per-day or per-transaction. About two-thirds of institutions studied by a research firm had a minimum threshold. Similarly, some banks have a grace period during which you can cover the overdraft to avoid a fee.
3. What is the policy for closing an overdrawn account?
Banks varied widely in how often they closed an account for unpaid overdrafts — those at the high end of the scale closed accounts 14 times more frequently than those at the bottom. The number of overdrafts and the length of time they go unpaid can both result in an account being closed, which will make it difficult to open another account elsewhere.
4. What are costs of linked account coverage?
Drawing on a linked account or a credit line may be cheaper than paying overdraft fees, but there are costs with this route as well. Transfer fees charged to cover an overdraft ranged from $3 to $20 per transaction, the CFPB found.
Beyond shopping around for fees, there’s the question of whether you should opt in for a protection program in the first place. Even with reasonable fees and waiver policies, the cost of overdrafts can be difficult to estimate because of the different ways that banks post transactions, the CFPB report said.
On one hand, coverage can help you avoid late fees and bounced check fees from merchants. Then again, so can keeping an accurate balance in your checkbook and deferring purchases that you lack the funds to pay for right now.
It’s your call. But it will certainly be cheaper to let one of your friends at dinner float you a small loan to pay your share of the check — and you won’t even have to go in the back and wash dishes the rest of the night.