Decline the Fine: Say No to Automatic Overdraft Coverage

Automatic overdraft coverage, or an overdraft line of credit, is a fat cash cow for banks — worth billions in pure profit — or at least it was. Recent federal legislation now requires that financial institutions ask customers if they want automatic overdraft coverage. Banks such as Chase have launched an aggressive (one might say rather desperate) campaign to make you believe you want it. Trust me, you don’t.

Take, for example, your checking account debit card. That’s where automatic overdraft coverage could hurt you the most. You may think you need an overdraft line of credit for some emergency — while on vacation, perhaps — but isn’t that the same purpose a credit card serves?

Truth be told, I hate credit cards. And an overdraft line of credit would just transform my debit card into a credit card. Like it or not, I’m a big fan of debit cards, precisely because they’re not credit cards. As I mentioned in an earlier post, a VISA debit card is my only payment method for everyday purchases, including those online. Yes, I’ve heard the warnings about identity theft. But saying goodbye to annual fees, fluctuating interest rates and snowballing debt … well, that’s way more important.

Having said that, there’s been one nagging issue bothering me. Until recently, my bank did provide automatic overdraft coverage on my debit card. Automatic — as in I, the cardholder, had no choice in the matter. That meant if my debit card ever got stolen, the thief could go on a practically unlimited spending spree with an overdraft line of credit, even if my bank account was empty.

Why would a bank want to approve overdrafts automatically? This a tough one. Hmmmmm, let me think. Wait a minute. Could it be … FINES?!?

Automatic overdraft coverage or overdraft “protection”, or whatever banks call it, is nothing more than a gumball machine spitting out fines. You, as a smart customer, may be good for only one or two gumballs (overdraft fees) but you’re always in danger if your balance gets too low. The New York Times calls this scenario the $40 cup of coffee.

Even if the bank collects just a small number of overdraft charges from each customer, automatic overdraft coverage adds up to billions — $20 billion, to be exact — in annual revenue.

I could elaborate by describing how banks prioritize your debits to increase the likelihood and number of overdrafts. This will be another post. Suffice it to say, automatic overdraft coverage is good for the bank and bad for you. It took federal legislation to put an end to this practice. That alone should tell you something.

Banks are now forced to ask if you want this overdraft line of credit on your debit card. You may receive such notification soon, if you haven’t already. Say no. Trust me, when using a debit card, you do not want that $40 cup of coffee or to give a pickpocket a field day at the mall. People who are responsible with money never make checking account overdrafts anyway. You shouldn’t need an overdraft line of credit. The answer is no, nyet, nein. Decline the fine. Say no to automatic overdraft coverage.