Why 'Overdraft Protection' Is BS

Welcome to chapter 56 of the thousand-page book I have written in my head entitled ‘why banks do NOT have your back and are totally out to get your money.’ 

Today we’re exploring all the reasons that overdraft protection is BS, why we’re in a toxic relationship with our banks, and what red flags to look out for 🚩

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What is overdraft protection?

Let me take you on a thrilling journey to explore our country’s rich financial history.                               

The year was 2010. 

Widespread complaints flooded banks from consumers being charged $35 in overdraft fees for overspending by as little as $11 dollars. An $11 dollar grocery shop for snacks was unexpectedly racking up to $46.

Slipping into your overdraft is easily done

Especially when transactions don’t appear in bank balances straight away. So you think you’re in your budget, then 🥊whabam🥊 the transaction processes the next day and you’re in your overdraft. And being charged for it, too. 

Federal regulators responded by creating a requirement for banks and credit unions to get consent from customers before charging fees. If customers didn’t ‘opt in’, then the transaction would just be declined. 

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So our besties the banks got creative and started marketing overdraft fees as a friendly service 🥰

Playing on our pain points and persuading people to ‘opt-in’ (damn that was a lot of Ps) to avoid the embarrassment of having their debit cards declined for insufficient funds. This is the first red flag.

In some cases, overdraft protection includes transferring from a linked savings account. For example, the Bank of America charges a $12 fee per transfer from a linked bank account, which is less than the $35 overdraft fee. 

But still, like… $12 to transfer your money into your account… bruh…

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What is misleading about the term ‘overdraft protection?’ 

The problem with the term ‘overdraft protection’ is that the bank is protecting you from being punished by…the bank. 

 Let’s break it down: 

💰 If banks never allowed you to spend money you didn’t have, and just declined transactions that you didn’t have enough funds for, then they wouldn’t need to charge overdraft fees. 

💰 If they didn’t charge overdraft fees, then you wouldn’t need overdraft protection to ‘protect’ you. 

It’s almost like the banks are inventing problems because it benefits them in some way. (Ahem, US banks made $6.13 billion in overdraft revenue in the first nine months of 2021 alone). 

Not that we’re drawing a connection here, but imagine a mob ruled a certain part of town. They asked the local businesses to pay a ‘protection fee’. The protection fee… that the businesses pay to the mob…  protected the business from… the mob.

This sneaky choice of language in the phrase ‘overdraft protection’ does have an impact:

More than half of people with overdraft protection don’t remember signing up for it. And 75% of people say they would rather just have their transaction declined than just charge a fee later.

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So… should you opt out of overdraft protection?

It’s totally up to you. 

Obviously, if you need to buy something essential and you’ve run out of money, an overdraft fee is going to look tempting in the moment. 

But it might make you feel worse in the long run, and keep you in a spiral of overdraft BS 🌀

Having your card declined is extremely stressful, but it definitely shouldn’t be embarrassing or taboo. And banks definitely shouldn’t be benefiting from this embarrassment. 

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There are alternatives to overdraft protection

💙 Many banks offer multiple alerts before you reach your overdraft. For instance, you can set one up for when your account drops to less than $75 and another for $25. This means you have time to stop spending or transfer money from your savings account… without paying a bank robot $12 to do so.

💙 Obvi, the less sexy option, is creating a rock-solid budget to help you feel more in control of spending. (Now for the shameless segue into a plug for our app - we’ll keep it short.)

💙 Basically, we have a free money app that’s pretty good at helping with stuff like budgeting and managing money ins and outs. She’ll even roast you for your spending if you ask her to, and hype you for all the good you’re doing. 

(And if you are stuck in your overdraft right now, don't worry - we have a whole blog post on what to do right here)

We think it’s the best money app in the world, but we would say that. 

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Enjoy this post? Def give it a share or send it along to a friend. You never know, it could make a big difference. And of course, if you want to try the best money app in the world for free, just hit this link right here.

Big love. Cleo 💙