Nothing can put a young bank customer in a hole faster than paying overdraft fees on a checking account.
Typically $35 a pop is the price you pay for spending more money than you actually have in the account. Banks essentially front you the money — for the fee — until you can replenish your account. That’s the idea anyway.
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If you’ve ever had insufficient funds in your checking account and been charged the overdraft fee, the mistake can cost you dearly, especially if you’re a repeat offender. And it’s no fun cleaning up the mess.
But Bank of America, the nation’s second-largest bank, may soon be pulling the plug on that practice. And that would be a good thing — a little embarrassment at the cash register can be just the motivation needed for young account holders to learn to live within their means.
According to a Wall Street Journal story, Bank of America is considering offering a new checking account that wouldn’t allow customers to overdraw their balances at an automated teller machine or when making an automatic bill payment. The bank also would no longer cover checks written on accounts that had insufficient funds.
The no-overdraft account will be one option customers can choose if the program is launched in the coming months, the Journal reported. Bank of America has declined to comment, but according to the newspaper, the bank would be the first big financial institution to prohibit overdrafts on checking accounts.
And if it does roll out the program, you can bet many big and small banks will follow.
“This is a positive development, particularly for those consumers who frequently have low account balances and need to be able to pay bills, buy groceries and conduct everyday transactions without the threat of punitive, frequent and potentially abusive fees,” said Tom Feltner, director of financial services for the Consumer Federation of America, an advocacy organization.
Regulators have been critical of overdraft plans for some time.
Since 2010, banks have been required to allow customers to sign up or opt in for overdraft protection on ATM withdrawals or most debit card transactions. It’s strictly voluntary and, predictably, millions of customers have agreed to pay the fees rather than knuckling down on managing their money.
A study released in June by the Consumer Financial Protection Bureau found that consumers who incurred one or more overdraft fees in 2011 paid an average of $225 in total overdraft fees each year. The study also found that customers who accepted the coverage were more likely to end up paying the fees and more likely to end up having their account involuntarily closed by the bank.
Despite the charge, the service remains popular, the consumer bureau said. At some banks in 2011, more than 40 percent of new customers opted to sign up for the overdraft coverage.
Given the millions of dollars the charge generates for Bank of America, why would it want to give it up?
Feltner said banks are increasingly looking at ways to provide basic banking services “with clear, upfront, no-strings-attached bank accounts.” When fees are clear upfront, he said, consumers are in a better position to know their monthly costs.
But Bank of America might also be weighing the cost of closing deadbeat accounts, which is no small thing, even for megabanks.
In the meantime, help your teen or young adult make smart choices when shopping for checking accounts and other bank services. Steer clear of overdraft protection services. A better option: Set up text alerts so your young consumer will know when the account balance is dipping near zero.