When your bank hits you with an overdraft fee, it’s actually a fee from the bank for extending you a loan of the money necessary to cover the difference between what’s in your account and the charge on your account. The practice originated when everyone was still relying entirely on checks: it may be the norm now that we can check our balances online, via text messages or at an ATM, but that’s a recent development. The fact that almost any business that accepts debit cards can process a transaction on the spot is equally modern.

The Problem With Overdraft Fees

If it could be days before a bank found out that an account holder had written more checks thank his account could cover, and even longer before the account holder could be made aware of the situation, overdraft fees could be a blessing in disguise. As long as a person was able to cover both the overdrafts and the fees, a short-term loan from a bank could be worth the money.

But the fact of the matter is that these days, overdraft fees have a certain resemblance to predatory loans. Assuming that you rely on your debit card, rather than paper checks, your bank can tell you when a purchase would trigger an overdraft. At an ATM or a business where you swipe your card, the transaction typically goes through immediately — if you were informed that completing a transaction would drop you to a negative balance, you could avoid any overdraft fees.

It doesn’t help that, according to the Center for Responsible Lending, most overdrafts are small: “Most debit point-of-sale overdrafts are small, averaging less than half this $34 fee, meaning that these overdraft loans cost nearly $2 for every dollar advanced to cover the shortfall.” In terms of loans, that makes overdraft fees incredibly expensive.

Talking To Your Bank About Overdraft Fees

Most banks automatically enroll their customers in an overdraft protection program. The typical program includes automatically approving transactions that trigger overdrafts for a fee — on average, $34 but as high as $75 at some banks. But you aren’t actually required to take whatever overdraft options your bank offers at face value. You have several options:

• You can choose to make the switch to a bank or credit union that does not automatically approve transactions that will put you in the hole. As long as you use a debit card, the bank will block transactions that would cause you trouble.
• Link your checking account to your savings account or line of credit. Rather than using the bank as a lender, you’ll just fall back on an already-established (and cheaper) line of credit or use your own money.
• Create alerts for yourself through budgeting programs like Mint that notify you when you’re getting too close to overdrafting.
• Check with your bank for alternatives to your current overdraft protection.

These solutions may not be ideal, but they’re the main options available. The Center for Responsible Lending is working to limit abusive overdraft practices — but not all banks are too interested in losing their lucrative fee schemes.

Popularity: 20% [?]