People wrote in to Money Magazine complaining about the “raw deal” that is overdraft fees. People were complaining that they were hit with multiple fees because checks they had expected to clear had bounced. The problem? They didn’t have money in their checking accounts to cover some of the checks in the first place, which they were expecting, just not all.
What happens is that banks processed the largest charges first and thus, when there wasn’t enough in the account, then all smaller checks also were charged an overdraft fee. For example one reader had $30 in his checking account and had two debit charges for $5 and $5 and a check for $435. Then he got hit with 3- $35 overdraft fees. While I understand his frustration, I don’t feel bad for the guy. He knew he didn’t have enough money to pay his bills yet he was still using a debit card and writing checks?
It’s been argued that you can’t overspend with cash unlike CC. My rebuttal has been even with cash you can’t necessarily afford it. And no it seems that even with cash you can overspend by using overdraft on your checking account. That many people on the article were overdrafting hundreds of dollars because they had no idea how to balance a checking account. These people are hurt that if they overspend cash by one penny they are charged a fee.
I have to wonder, if these same people aren’t the ones running up credit cards? I mean they cannot balance a checkbook and have no conception that once you spend money it’s gone. On the talkback blog one response is What you forget though, Bill, is that you probably aren’t aware of what you have outstanding. Maybe you are but for most people that is difficult to figure out - what checks have hit and which ones haven’t, etc. To have the grasp on it that you propose would mean people would be spending hours every day reconciling.
OMG. When I was around 10 my mom sat me down, gave me a checkbook, and had me start paying bills. Every check I wrote I immediately wrote it on the check register as money spent. As we used to pay for groceries with checks, at the grocery store while in line I would write the check and on the register the amount paid and reconcile it in the car.
Most of the people with overdraft fees have no idea what is outstanding on their accounts literally. They are using their debit cards or writing checks and many know they don’t have the money but they do it anyway. And then they complain about the fees.
I can’t understand why people say you can’t overspend with cash because it’s now obvious that people can and do. And I understand why people believe they spend more with credit cards. Because these same people who are spending more than they make with cash probably do the same with credit cards.
So is it really credit cards that cause people to overspend? Or is it really the person and the behavior they exhibit? But wow I didn’t realize how hard it is to balance a checkbook and cash, or that people regularly overdraft checks because that’s how they live.
12 responses so far ↓
1 Pooja Sood // Sep 5, 2008 at 1:03 pm
i completely agree, problem is not credit cards, problem is your attitude.
2 AS Green // Sep 5, 2008 at 1:29 pm
This is a really good point. I use my credit card all the time but I keep track of every expense like it is my debit card and then mark off when it is paid. Those that don’t with there credit cards probably don’t with there debit cards or checks either. It is about behavior, habits and responsiblity when it comes to money.
3 Abby // Sep 5, 2008 at 5:55 pm
Overdraft is not something are “victimized” by. They lose track of their spending and they overdraft. I say this as someone who has done it and who has a husband who has given hundreds of dollars to his bank.
Part of his problem is negligence, part of his problem was my insisting on taking too much out of his account to pay bills and then asking him to cover something “because he had money in his account” and the last bit of the problem is that he has ADD which apparently makes finances extra difficult.
So in the end, we looked at the likelihood that we would rack up overdraft fees even when being careful, and started putting more expenses on the cards. Not ideal, obviously; but if something is generally bad policy and something else is even worse… well, you choose what’s most likely to work and cost the least. And, even with credit card interest rates, we’re still paying less than we would with overdraft fees.
4 Livingalmostlarge // Sep 5, 2008 at 7:00 pm
Interesting that overdraft fees cost more than CC interest.
5 Patience // Sep 6, 2008 at 7:53 am
Someone actually thought it would take “hours” or reckoning each day? I spend about 10 minutes a month balancing my checkbook, and it takes about 3 seconds to record checks in the register as I write them. I don’t use a debit card, but I keep a daily record of what I’ve charged on my credit card so I am in touch with my spending, and this takes, at most, five minutes a day–usually less.
6 Tim // Sep 6, 2008 at 8:42 am
I agree, there’s a void in personal responsibility. By the sheer fact that banks have raised overdraft fees, indicates people are increasingly overdrafting. I know when I was younger, I counted on the 3 day float for check processing, I viewed overdraft as an extension of my account, but that was when i was stupid and had some wierd notions about finances. That was behavioral.
my colleague was really happy when she paid off a credit card. this led to a discussion about how she viewed credit cards, which she replied that it was difficult for her to stop thinking that the available credit equates to money she has available to spend. I remember having the same mentality when I was younger. It’s behavioral.
7 Livingalmostlarge // Sep 6, 2008 at 3:02 pm
But it puts to rest the idea that only credit cards cause debt. It seems like it can be done with cash.
8 Abby // Sep 6, 2008 at 3:21 pm
Oh definitely!
By the way, I was inspired to do my own post about this. I did a link to your piece.
Thanks for the idea
11 MyDebtRefinance // Sep 19, 2008 at 2:42 am
A complete lack of discipline and financial ignorance are the problems. Not everytime is about credit and interests, is more about not knowing what you have and what you can spend.
12 Daphne Lim // Sep 29, 2008 at 10:15 pm
Thought-provoking post, especially since I recently blogged about trying a weekly cash budget and using only cash as a way to rein in spending, but then I was referring to cash in hand and not out of an overdraft facility. Yes, it’s a disaster how some people aren’t aware of the interest trap they’re falling into.
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