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Beware banks with overdraft fees

By Jennie L. Phipps · Bankrate.com
Tuesday, July 30, 2013
Posted: 4 pm ET

Beginning earlier this year, Social Security made it mandatory to receive payments electronically.

One result has been an increase in the number of people living in retirement who are paying their banks significant overdraft payments because they can't manage their accounts, according to a report from the nonprofit Center for Responsible Lending.

The center blames exorbitant overdraft fees charged by banks. In a report on the problem, the center's attorney Rebecca Borne points to a woman living on $1,200 a month in Social Security who was charged a total of $448 in overdraft fees over the course of two months. Borne concludes that this woman would have been far better off if she had declined the bank's overdraft "protection" because two of the transactions would have been immediately refused, lowering the penalties to $242. "Consumers have the right to opt out of this extremely high cost product, even customers who have opted in after they have been persuaded by aggressive marketing," Borne says.

While Social Security prevents lenders from garnishing Social Security (except for student loan and child support payments), it doesn't prevent banks from taking money from recipients' accounts to pay overdraft fees, Borne says. In fact, she believes banks have actually identified these vulnerable customers as potential sources of profit. "I think that banks are going to great lengths to maximize overdraft revenue, and they prey on those who have trouble coping and make their situation worse," she says.

Nobody's retirement planning can withstand this kind of fiscal onslaught. If it happens to you once, don't let it happen a second time. The obvious solution is to closely monitor your spending, taking out enough money to pay incidentals with cash, ensuring that there is enough money in the account to cover the bills you must pay directly from it.

As my mother used to say, "Fool me once, shame on you. Fool me twice, shame on me."

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1 Comment
ciara joyce
August 02, 2013 at 6:10 pm

Last winter, I made a simple arithmetic error while balancing my checking account and caused a check to bounce. Things got crazy. My now former bank always charges three bounced check fees. I use a bill paying service and they put their $12 fee through four times, including twice the first day, two hours apart. I called my bank and asked them to freeze my checking account until I could get things straightened out. "No problem." No problem, but they only froze the account for three or four days, then started bouncing checks off the empty checking account again.

I had been able to call Social Security and have them send me a paper check (it was before March), so I had some money, but not enough. It is terribly frustrating dealing with any bank or credit union, but I've stopped all deposits to my former credit union (even though I owe them a fortune) and opened a new account elsewhere. They had the nerve to call me and demand to know where I had my new bank account. I just hung up the phone.

I guess if something like that happens again, you can try to open a checking account in new bank and get Social Security to send your direct deposit to the new bank. I don't know how fast they will do it. They were backed up in February and March with setting up new direct deposits, but when I called to switch to a paper check, they had that set up incredibly fast, and I was able to get a paper check for my "pay day" the next week.

One thing to consider, depending on how you pay your bills: see if you can simply avoid buying checks for the new account. They are quite expensive and if you can keep records for your debit card -- and not miss any debits -- you really don't need checks.