19 - Overdrafts Explained: Fees, Protection, and How to Avoid Them

Overdrafts can be a source of stress and costly fees. Joined by Compliance Operations Specialist Amy Earl, we provide a transparent look at how they work and the choices you have as a consumer. In this episode, you will learn the crucial difference between Overdraft Protection and Overdraft Privilege, understand your important "opt-in" rights for debit card transactions, and discover simple, proactive habits and mobile alerts you can set up to avoid overdrafts altogether.

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Transcript

19 | Overdrafts Explained: Fees, Protection, and How to Avoid Them

00:00:00 Daniel Hill: Hey, Shanna. I think we've all had that moment. You're at the grocery store. The line is long behind you. The cashiers tell you your total, and as you go to swipe your debit card, you have that split second thought of. I think there's enough in there.

00:00:18 Shanna Browning: The worst feeling! I've done it. You're just hoping the transaction goes through so you can just avoid the awkwardness of it being declined.

00:00:26 Daniel Hill: Exactly. And sometimes it does go through. Even if you didn't have the funds and you feel a sense of relief. But then a day or two later, you see an overdraft fee on your account, and that relief turns to frustration.

00:00:41 Shanna Browning: Of course it does. And it's a situation that happens to so many people. It's not uncommon, and it can be confusing, but it can be costly. So today, our goal is to demystify the entire overdraft process so you can feel confident and in control every time you swipe your card.

00:01:10 Daniel Hill: Welcome back to Making Sense of your Cents. I'm Daniel Hill.

00:01:14 Shanna Browning: Hi, friends. And I'm Shanna Browning. And today we're going to tackle a topic that can be a major source of stress and confusion for bank customers. And that is overdrafts.

00:01:25 Daniel Hill: And to help us understand the mechanics of how this all works, we're thrilled to have a true expert from behind the scenes. Amy Earl is a compliance operations specialist here at First Century, and she deals with these processes every day. Amy, thanks for taking the time out of your busy schedule to be with us.

00:01:43 Amy Earl: Thanks for having me. I'm happy to help clear this up because understanding the options is the best way to avoid unnecessary fees.

00:01:50 Shanna Browning: Whoop, whoop. Amy's here. So Amy, let's start with the most, most basic definition. In the simplest terms, what is an overdraft?

00:02:00 Amy Earl: An overdraft occurs when you don't have enough money in your checking account to cover a transaction, but the bank pays it anyways. You've overdrawn your account, meaning your balance goes into the negative.

00:02:09 Daniel Hill: So it's different from a transaction simply being declined.

00:02:15 Amy Earl: Yes. And that's the key distinction. Distinction. If a transaction is declined, it's because you don't have the funds and you don't have an overdraft service in place to cover it. It can be embarrassing and it doesn't cost you anything. An overdraft is when the bank, as a courtesy, covers the transaction for you, which the tip then typically incurs a fee.

00:02:33 Shanna Browning: Okay. All right. So what kinds of transactions can cause an overdraft.

00:02:38 Amy Earl: It can be several things. It can be a check that you wrote that just hasn't cleared an automatic bill payment. That came through like an electric bill or a car insurance. It could be an ATM withdrawal. And depending on the choice that you've made, it can also include one time debit card purchases, like at a grocery store in your example, Daniel.

00:02:57 Daniel Hill: So let's talk about the psychology of why this happens. It's not always just a big, unexpected purchase. Sometimes it's a simple matter of timing, right?

00:03:08 Amy Earl: Absolutely. This is the most common scenario that we see. You might look at your mobile app and see a balance of one hundred dollars. You think I'm fine!

00:03:16 Shanna Browning: Been there.

00:03:17 Daniel Hill: Me too.

00:03:18 Amy Earl: But you forgot about that seventy five dollars check that you wrote three days ago. That just hasn't cleared yet. You then go in to make a debit card purchase. When that check finally comes to your account days later, your account is overdrawn. The timing of the transactions that posted to your account is a huge factor.

00:03:35 Daniel Hill: Okay, that all makes sense. I think we all can associate with that. We've all been there. All done that. Yep. Let's get into the customer choices that are available. When a bank covers a transaction, it's part of a service. Amy, can you break down the main types of overdraft services that we have?

00:03:55 Amy Earl: Sure. Broadly speaking, there are two main paths a customer can choose. First, we call overdraft protection. This is a service that you proactively set up by linking your checking account to another account, usually a savings account here at the at the same bank.

00:04:09 Shanna Browning: Okay, so what I'm hearing you say is if you don't have enough money in your checking account and I go spend that money, the bank's automatically going to pull the funds from my savings account to cover that transaction.

00:04:20 Amy Earl: Exactly. This is a great first line of defense. The transaction still goes through. You avoid being declined, and you avoid any higher fees associated with standard overdraft. There's often a smaller transaction fee for this service, but it's typically way less than the standard overdraft fee.

00:04:37 Daniel Hill: What's the potential downside? Because, you know there's a downside to everything. What's that downside of relying only on this method?

00:04:45 Amy Earl: The main thing to be aware of is that you are moving money out of your savings. If it happens too often, you can deplete your emergency fund or other savings goals without even realizing it. It's a fantastic safety net, but it shouldn't be a substitute for keeping a healthy buffer in your checking account.

00:05:01 Shanna Browning: And as we talked previously, savings or savings. And that's what we want that to be. But it's a great first line of defense, as Amy said. So that's our overdraft protection piece. So a proactive link to your own money. So tell me the other path, Amy.

00:05:15 Amy Earl: The other service is what's called overdraft privilege. This isn't linked to another account. This is when the bank, at its discretion, covers the transactions for you when you don't have the funds in your checking account or a linked savings account. This is a service that typically comes with standard higher overdraft fee. For example, for First Century Bank thirty five dollars per item.

00:05:34 Daniel Hill: And Amy, what's the benefit of having this service, especially if it sounds, you know, expensive.

00:05:40 Amy Earl: The primary benefit is avoiding the disruption and potential fees from a returned item. For example, if you wrote your monthly rent check for one thousand dollars and it was returned for insufficient funds, you would not only get an NSF fee or a Non-sufficient fund fee from the bank, you would likely also get a significant bounced check fee, often fifty dollars or more, from your landlord. Overdraft privilege can prevent the cascade of fees and complications.

00:06:07 Shanna Browning: So that's quite a bit of money. If we're talking thirty five from us as the bank and fifty from a landlord. I mean, that's a lot of money for.

00:06:15 Daniel Hill: Adds up quickly.

00:06:16 Shanna Browning: A bounced check. So. All right. So this is a great time to clear up just some common myths Daniel, what's a big misconception people have about overdraft fees?

00:06:25 Daniel Hill: Well, I think probably and I hear it all the time. The biggest myth is that the bank is just trying to make money off my mistake.

00:06:35 Shanna Browning: Yep.

00:06:36 Daniel Hill: And it certainly can feel that way when you get a fee. But, Amy, what's the reality from the bank's perspective?

00:06:44 Amy Earl: The reality is that it's a service designed to prevent a worse outcome. The alternative, as we just discussed, is for the bank to return the item unpaid. This leads to the landlord's bounced check fee, a potential negative mark on the rental history, or a late fee from your car insurance company. The overdraft fee, while not ideal, is often less costly and disruptive than the alternative. We would much rather our customers avoid the this situation altogether.

00:07:09 Shanna Browning: One hundred percent. That is correct. And so here's another one myth. If I have overdraft protection linked to my savings, then it's completely free to use.

00:07:20 Amy Earl: That's a good one to clarify. Fact: While it's much cheaper, it's not always free. Most banks charge a smaller fee, say five dollars or ten dollars for each day an overdraft protection transfer is made. It's still a huge savings compared to a thirty five dollars overdraft fee. But it's important to know that it's there. The goal of that small fee is to be a signal to help you notice that your checking buffer is too low, so you can make adjustments.

00:07:45 Shanna Browning: Well, and all that makes so much sense. So that's very, very clear to me. So Amy, let's touch on one of the most common points of confusion debit card transactions. I think a lot of people think the bank will just automatically cover them if they're short. Can you explain the special rule that applies here?

00:08:04 Amy Earl: This is without a doubt the most important thing for listeners to understand, due to federal regulations put in place to protect customers, a bank cannot charge you for an overdraft fee for a one time debit card purchase, like at a store or a gas station, or an ATM withdrawal, unless you have specifically given permission to do so. This is called opting in.

00:08:25 Daniel Hill: Okay, Amy, so let's walk through a clear scenario. Like I said in the open, I'm at the grocery store. My total is fifty dollars, but I only have forty in my checking account. I have not opted in. What happens when I swipe my card?

00:08:42 Amy Earl: Well, Daniel, typically for First Century Bank customers, the transaction would be declined. It might be embarrassing for the moment, but when. But you would not be charged any fee from the bank because we would not cover that transaction. There are other cases where things might be different, but that depends on the merchant where you are making the purchase.

00:09:01 Shanna Browning: Okay, so same scenario. I'm at the store fifty dollars total, forty in my account, but this time I have opted in to the overdraft privilege service that we talked about earlier for my debit card. Now what happens, Amy.

00:09:16 Amy Earl: In that case, the bank may, at its discretion, cover the fifty dollars purchase. The customer's account would go into the negative ten dollars, and they would be charged a standard overdraft fee for that service.

00:09:27 Daniel Hill: So the choice really is in the customer's hands. You're choosing between two outcomes the certainty of a decline at no cost, or the convenience of having the transaction potentially covered, but with a fee.

00:09:40 Amy Earl: That is the perfect way to phrase it. It is a conscious choice, and it's not a permanent one. You can change your mind at any time simply by calling us, or stopping by a branch to change your opt in status.

00:09:50 Daniel Hill: Amy. This has been incredibly helpful in understanding the opt in rule, and that alone is a huge piece of the puzzle. Now it's time to put it in practice with this week's actionable tip.

00:10:06 Shanna Browning: Y'all know we love our action item tips. So for this week, it's simple, but it's powerful. And we want to we want you to set your alert.

00:10:17 Daniel Hill: Almost every mobile banking app, including ours at First Century, allows you to set up customized account alerts. Your task this week is to log in to your mobile banking app, find the alert section, and set up a low balance alert.

00:10:32 Shanna Browning: Now for you. It can be whatever you want that threshold to be to make you comfortable. Maybe it's one hundred dollars, maybe it's fifty. The app will then automatically send you a text message or an email when your checking account drops below that amount.

00:10:47 Amy Earl: Absolutely. I can't recommend this enough on an operational perspective. This one simple alert is the single most effective tool for preventing overdrafts. It's a proactive digital tap on your shoulder that says, "Hey, pay attention, your buffer is running low." It gives you time to stop spending or to transfer money before your overdraft occurs.

00:11:08 Daniel Hill: It turns your phone into a powerful tool for avoiding fees. Ease takes two minutes or less to set up in the app and can save you a lot of money and stress.

00:11:17 Shanna Browning: Well, and what's our goal? Saving money right? And stress. Nobody likes extra stress. Amy, you're the best. Thanks for joining us and breaking this down so clearly and easy.

00:11:28 Amy Earl: It was my pleasure. I'm happy to help.

00:11:31 Daniel Hill: Next week, we'll be talking about a powerful tool for homeowners who have built up equity in their homes the Home Equity Line of Credit, or HELOC.

00:11:40 Shanna Browning: Subscribe wherever you get your podcasts so you don't miss it. For Daniel Hill and our wonderful, wonderful guest, Amy Earl, I'm Shanna Browning, and thanks for listening.

00:11:50 Daniel Hill: Don't forget to send us those questions at podcast@fcbtn.com. And as always, go out and make some sense of your cents.