A few of the big banks have a new way of encouraging financial literacy.
It’s accidental, mind you. In introducing higher costs for overdraft protection, some banks are also schooling their clients on why it’s bad to spend more than you have.
Confession: Even personal finance columnists use overdraft from time to time.
It’s a great source of comfort to know that my wife and I will never be caught short as money flies in and out of our joint chequing account on a daily basis.
But there’s a difference between needing overdraft to cover infrequent minor glitches and using it to offset serial overspending.
It’s this latter group that some banks are penalizing with their pricing of overdraft protection.
We’re not talking here about interest rates, which are already well into double digits for overdraft balances.
Where banks are raising the cost of over-spending is in the fees they charge when your account goes into the red.
Starting April 1, Canadian Imperial Bank of Commerce will offer clients a choice of paying a fixed $4 per month for overdraft protection or a $5 fee every business day an overdraft is created or increased. Currently, CIBC charges a flat $5 per month if you have one or more overdrafts.
Royal Bank of Canada and Toronto-Dominion Bank already offer clients the choice of paying as they go for overdraft protection, or committing to a fixed fee.
The practices at other banks show something interesting: At a time of convergence in banks fees and account packages, overdraft is a real differentiator.
You may not care much about overdraft protection if you’re disciplined enough to always have a positive balance in your account.
If you’re not, and I’m in that group, then overdraft is essential. It covers you if your cheques, online bill payments and automatic deposits and debits don’t always line up in a way that keeps you in positive balance.
Overdraft can help you avoid the embarrassment of having a debit transaction declined, or a cheque bounce, and help you avoid any charges from the utility or other party you’re trying to pay.
NSF cheques (stands for non-sufficient funds) may also hurt your credit rating.
A credit guide from the federal Financial Consumer Agency of Canada says bad cheques can stay on your record for six years (read it here).
Infrequent overdrafts in your account are no big deal. Repeated overdrafts are a problem that can’t necessarily be solved by paying your bank $4 per month. If that sounds like a good value, then you need to look at whether you’re chronically spending more than you should.
The cost of overdraft depends a lot on what bank you deal with.
The online bank ING Direct allows you to be overdrawn by as much as $250 in its Thrive chequing accounts at no cost. ING’s so-called Whoops Protection gives you 30 days to bring your balance back above zero – after that, you pay a $2.50 fee for every 30 days your account is overdrawn (higher overdrafts aren’t allowed, ING says).
Other banks typically charge a flat $5 or so if you go into overdraft at any point during the month.
The $5 fee is charged once during the month, even if you go into overdraft multiple times. RBC, TD and (shortly) CIBC have upped the ante on fees for serial overdrafters by requiring them to either commit to $4 per month or risk getting dinged for $5 multiple times during a month.
Something all banks have in common is that they make good money on overdraft, even without fees considered. Overdrawn balances are charged interest at a rate of 19 to 21 per cent on an annualized basis, which is in credit card territory. Expect to pay interest on top of any fees you’re charged for overdraft protection.
Bank of Montreal and RBC are examples of banks where overdraft protection may be included in your chequing account package.
Also, your bank may do you the courtesy of transferring money from another account into your chequing account to cover a shortfall. But given how overdraft pricing is changing, it’s a good time to see what you have and how much it costs.
CIBC said clients who use overdraft often can expect a phone call to point out the benefits of paying $4 per month instead of on a pay-as-you go basis. If you get one of those calls, consider it a lesson in the cost of overspending.
Overdraft protection basics
What it’s for
Covers you for cheques, bill payments and debits that exceed the balance in your account.
What it covers
$250 to $5,000 is a typical range
How to get it
Some bank account packages include overdraft protection; in other cases you have to specifically sign up for it; a credit check may be required.
Some banks charge a one-time fee every month you go into overdraft; other banks offer you a choice of paying a fixed fee for overdraft protection or separate fee every time you create or increase an overdraft.
Up to 21 per cent on an annualized basis.