Embarrassment Is A Lot Less Expensive & Easier To Handle Than Overdraft Fees

Overdraft limits are rising south of the border but, in Canada, the dependence on this expensive source of credit is a closely guarded secret.

One thing is for sure. Our banks are making lots of money from service charges, and overdraft “protection” is one of the products designed to separate us from our money.

A study from Lake Bluff, Illinois-based Moebs Services found that being in an overdraft position made a comeback in 2012 after the U.S. government passed legislation back in 2010 that made it more difficult for banks to offer the service to consumers.

It sounds like a good deal until you get hit with an overdraft fee of US$30, the median rate according to Moebs, and then get dinged again for interest rates well above the prime lending rate.In 2008, overdraft revenue at U.S. financial institutions climbed to US$35.4-billion, aided by rules that simply allowed your bank to put you into hock if you spent more than you had as opposed to just rejecting the transaction.

So the Americans cracked down on the practice and the total amount of overdraft revenue dipped to US$31.6-billion before climbing to U$32-billion last year.

“At the rate of growth for the past nine months, overdraft protection will be at an all-time high by 2016,” says Moebs Services, in its release.

Bill Hardekopf, chief executive of Birmingham, Ala.-based lowcards.com, said the U.S. rule changes forced people to opt in to overdraft protection rather than being automatically granted the privilege if they didn’t have money in their account.

“The numbers are creeping back up because the banks are doing a great job of saying ‘don’t you want your card to be accepted anytime anywhere’,” said Mr. Hardekopf.

The Canadian Bankers Association says overdraft protection is covered under negative option billing regulations — it cannot be added without consent.“If you are at your supermarket and you only have $50 in your chequing account and you have a $100 purchase, the cashier tells you your card is no good. You suffer the embarrassment of hearing that and that bag boy looking at you like you don’t have any money. But that embarrassment is a lot less expensive and easier to handle than an [overdraft fee].”

But a bank can still allow a cheque to go through that would send you into overdraft as a courtesy, and charge the fees and interest that are disclosed when opening an account. You may be grateful for this if it saves you an insufficient funds charge that can cost as much as $35. But either way you will pay.

I’ll admit to having been talked into overdraft protection at my bank. I’ve made use of it, mostly because of my own sloppy accounting and forgetting about cheques I’d written. But it comes with a cost. A high one.

Even a payday loan, which can be as much as 21% per $100 for two weeks, in Canada, could be a better deal than going into overdraft

Canadian Imperial Bank of Commerce, for example, rolled out a fee hike April 1 that will cost consumers $5 for going into overdraft and an additional $5 every time another charge is added on the account. It does provide the option of paying a $4 monthly fee to avoid multiple charges. On top of this is a 21% interest rate.

All of Canada’s large banks count on service charges for a big chunk of their revenue, says Peter Routledge, director of equity research for financial services at National Bank Financial.

“They have an incentive to not discuss [overdraft],” said, Mr. Routledge, noting if you look at the income statements of the banks you can get an idea of how much they make off of service charges in general.

He says, for example, Toronto Dominion Bank made $23-billion in revenue in 2012 and $1.8-billion came from service charges.

The U.S. study notes that even a payday loan, which can be as much as 21% per $100 for two weeks, in Canada, could be a better deal than going into overdraft.

Scott Hannah, chief executive of the Vancouver-based Credit Counselling Society, won’t promote the payday loan option, but he says at least half the people his company helps with borrowing problems are in an overdraft situation.

“Sometimes people will have money in a savings account and not be effectively managing their money,” said Mr. Hannah. “Sometimes you might have a joint account with your spouse and not be communicating [about a cheque or something that would put you in an overdraft position.].”

Avoiding these charges could just be a question of being mindful of what is going on in your accounts, but Mr. Hannah says overdrafts are often used liked credit cards or a line of credit.

“That was not the intent. It was there for the occasional bookkeeping error or for something that just came out of the blue,” says Mr. Hannah, who notes an overdraft can also lower your credit rating.

There’s one way to avoid the fees all together. Just don’t use overdraft at all.

Lisa Manwaring
Meridian Southwest Mortgage
tel: (604) 943-8943
cel: (604) 805-1833
fax: (604) 943-8942

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