Is Overdraft Protection Real? A Look at the Big 4 Banks
Overdraft fees originated as a way for wealthy bank clients facing a liquidity problem to borrow money from the bank as a line of credit and pay it back with some interest. Today, overdraft fees often target those on the low end of the socioeconomic ladder, while wealthy bank clients can easily get overdraft fees waived or aren't charged for overdraft protection. It's easy for personal finance experts to flippantly say, "Don't buy what you can't afford." But for those on the bottom of the totem pole, basic necessities need to be met, and sometimes that means overdrawing an account and in turn being hit with a fee from the bank.
What does overdraft mean?
Overdraft or non-sufficient fund (NSF) fees are charged when a customer overdraws on an account, causing it to become negative. Bank fees and thresholds for overdraft vary, but the Big 4 Banks -- Bank of America, Citibank, Chase and Wells Fargo -- all charge above $30. Bank of America and Chase also charge extended overdraft fees for customers who cannot get accounts out of the red within five consecutive business days. As a safeguard, each bank also offers overdraft protection.
What is overdraft protection?
Overdraft protection is only useful if a customer has sufficient funds to move in a secondary account. Overdraft protection works like this:
A customer links checking account No. 1 to eligible account No. 2 (savings, money market savings, credit card, eligible second checking account). If the customer overdrafts in account No. 1, the bank is authorized to pull money out of account No. 2 and move it to account No. 1 to cover the charge.
For the service of moving a customer's money from account No. 2 to account No. 1, the Big 4 Banks all charge $10 or more. Cost to the bank: pennies on the dollar. It's also free if a person proactively transfers money him or herself before an overdraft occurs.
Overdraft fees for basic checking accounts at the Big 4 Banks:
Bank of America
Bank of America wins the not-so-coveted title of worst of the Big 4 Banks when it comes to fees. In 2013, individual Bank of America branches earned almost $1 million in revenue from deposit account fees per year, according to FDIC data. Overdraft fees certainly played a role in racking up this amount.
Overdraft Fee : $35 per incident, maximum of four per day
Bank of America's overdraft fee, without overdraft protection, costs $35 per incident with up to four incidents a day. A customer could pay up to $140 worth of overdraft fees in a single day.
NSF (non-sufficient fund) fee : $35
Perhaps Bank of America decides to decline a charge on your behalf or return the item without paying. This will also result in a $35 charge.
Overdraft Protection Fee: $10
Bank of America customers looking to avoid a $35 blow do have an option: overdraft protection. There is no upfront cost to enroll in Bank of America's overdraft protection, but it certainly isn't fee-free. Notably, customers are not eligible for overdraft protection with a SafeBalance Banking account.
Extended Overdrawn Balance Fee: $35 after five consecutive business days
In a move similar to payday lending, Bank of America charges an additional $35 fee for a negative account balance lasting for five consecutive business days. For example, if a customer overdrafts on a $10 charge, she would pay $35 immediately. If she can't afford to pay back the $45 owed within five business days, she would then owe $70 for her initial $10 charge.
Citibank
Overdraft/NSF Fee: $34 per incident with a maximum of four per day
Citibank customers can be charged up to $136 per day in overdraft charges. There is no minimum threshold to be charged an overdraft fee with Citibank.
Overdraft Protection : $10
Citibank charges $10 on the day money is transferred out of a secondary account to cover an overdraft fee, and the charge is billed to the account receiving the transfer. The overdraft protection fee is waived for Citigold and Citi Private Bank customers.
Extended Overdrawn Balance Fee: None
Chase
Imagine buying a coffee and instead of it costing $3.50, it will cost $37.50. After public outcry on overdraft charges for small purchases, Chase bank changed its overdraft policy and now only charges overdraft fees on purchases exceeding $5.
Overdraft Fee or Returned Item Fee: $34 per incident, maximum three per day
An overdraft fee on items exceeding $5 still doesn't come cheap. Chase charges customers $34 per overdraft transaction with a maximum of three charges per day.
Overdraft Protection : $10
Chase bank transfers to cover overdrafts are generally made in $50 increments. Chase customers with a Private Client Checking account or Chase Premier Platinum Checking account (minimum balance of $75,000 to avoid monthly fees) will have their Overdraft Protection Transfer Fees waived.
Extended Overdraft Fee : $15 after five consecutive business days overdrawn
Similar to Bank of America, Chase charges an extended overdraft fee (but for less than half the price). This fee will be implemented on accounts that are overdrawn for five consecutive business days or more.
Wells Fargo
Similar to Chase, Wells Fargo only applies overdraft fees on transactions above $5. Wells Fargo charges some of the most expensive overdraft fees of the Big 4 Banks.
Overdraft/NSF Fee: $35 per incident, maximum of four per business day
On par with Bank of America, Wells Fargo can charge customers up to $140 per day in overdraft fees.
Overdraft Protection : $12.50 from savings account (line of credit and credit card fees vary)
Wells Fargo charges the highest fee for overdraft protection out of the Big 4 Banks -- $2.50 more than all three of its peers.
Extended Overdraft Fee: None
Do customers have better alternatives?
Customers worried about overdraft issues can switch to online-only bank accounts such as Ally or Bank of Internet USA. Ally charges $9 for an overdraft fee, with a maximum of one charge per day, and offers free overdraft protection. Ally won't charge a customer to move money out of savings to cover an overdraft transaction. Bank of Internet USA declines overdraft charges and doesn't charge customers. Most credit unions also offer lower overdraft charges, but they are rarely as low as online-only banks.
Erin Lowry writes about personal finance and manages social media for MagnifyMoney.com, a site dedicated to helping consumers save money by finding simple, transparent financial products. She is also the founder of the personal finance blog Broke Millennial.
