Overdraft fees... Part 2

Yesterday, we talked about overdraft fees and how they apply to checking accounts on the personal level. Recall my pretend account overdrawn by $10, and that $30 fee. Before we go into the fees on the institutional level, we need to take a short field trip into what a bank really does.

A bank takes in deposits (your money and mine) and in essence puts it in a big communal pot. For the most part, I don't need all of my paycheck at one time, and neither do you. Overall, we consumers spend it in dribs and drabs. The bank is required by law to keep a certain amount of it's deposits on reserve, not all of it. What isn't held on reserve is loaned out, and the person who borrows the money pays back what they borrowed over time plus interest. The interest (profit) goes back into the communal pot. This is a very simple description of what a bank does and how it makes money. The field trip is now over, so lets go back to those pesky overdrafts, and peskier overdraft fees.

The really big picture comes into play with the thousands of checking accounts any financial institution maintains. Remember, paying an item into overdraft is an extension of unsecured credit (loaning you money without collateral to back it up). As a former bank employee, I can promise you that the just overdrawn $10 or less or only by one item scenario I used is the exception rather than the rule. I conservatively guesstimate that there are easily 10-15 accounts overdrawn by $200+for each account overdrawn by under $10.

Sticking with my most conservative guess, 10 accounts overdrawn by $200 each plus my piddling $10 equals a whopping $2010 just the first day these 11 accounts are in the negative. Multiply that times the hundreds, perhaps thousands of overdrawn accounts, daily, and you can see that we're really dipping into Uncle Bank's pocketbook. Not only are we dipping, but it's a double dip. The number and amounts of loans a bank can make is affected by this extension of seemingly insignificant amounts of credit. Fewer loans going out = less interest (profit) coming in. Overdraft fees help recover that loss of income.

Before you get your knickers all twisted up, remember the fees are still much less expensive than the lawyer for court costs…and if you can't afford the fees, I strongly recommend investing in a pencil and paper to maintain your check register. They're much cheaper than the overdraft fees!