CNN Money posted an article today titled “BofA considers account that puts an end to overdrafts” which I think is a brilliant idea. For those of you who have not been following the overdraft issue it may be difficult to appreciate this potential move by B of A but trust me when I say that this is a move in the right direction. Banks earn money when people go into their overdraft by charging a flat fee per instance or per month. The fees can be a few dollars per instance to a monthly charge of up to $5.00 in additional to interest rates that can run up to 21.0% per year. This may not seem like a lot of money but across the portfolio of accounts that a bank would have this revenue can quickly add up.
I understand that banks and lenders need to make money. My specific issue is even making the overdraft available at all. To me if know you can go “over your available cash balance” chances are that you may not monitor your funds as closely as you would if you did not have overdraft protection. For clarification, NSF cheques and overdraft protection are not the same thing. If a cheque is returned NSF that means you simply did not have the money to make the cheque clear irrespective of the overdraft availability. Overdraft protection means you were a little short and the bank offered to cover for you. The “little short” actually adds up to a lot and in my opinion is really is not necessary.
Imagine if no bank offered overdraft protection. The result may be that people take a little extra time to look at their money and plan accordingly. While I believe you cannot live a person’s life for them I do believe you can help them avoid unnecessary decisions. Banks don’t have to offer overdraft protection but they do because they know people will use it and pay highly for its availability.
“Beware of little expenses; a small leak will sink a great ship.” – Benjamin Franklin
Get prepared for your next mortgage or loan.