If you are a disciplined spender and consistently have a positive balance in your bank account, you may not need overdraft protection. However if you are not, and most Canadians fit into this category, then overdraft protection can provide a necessary expense.
The idea of overdraft protection is to protect you when your bank funds cannot cover any cheques, online bill payments and automatic debits you charge to your account.
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 you’re trying to pay.
The Canadian Bankers Association stipulates that overdraft protection cannot be added to a person’s account without consent. Without this protection, banks can still allow a cheque to be processed that would send a consumer into overdraft as a courtesy, but a fee with interest may be charged on that transaction. At that time the bank will have plenty of incentive to encourage the addition of overdraft protection.
Many personal finance experts have suggested that even a payday loan, which can be as much as 21% per $100 for two weeks, in Canada, is a better deal than going into overdraft. If a monthly overdraft protection plan is not selected, it can cost a consumer $5, plus debt fees and interest, for each transaction that goes into overdraft. Overdrafts are subject to an interest rate of 21% per annum. If you are short a month and have 3 charges that do not go through due to insufficient funds, overdraft charges can escalate to a minimum of $50. That’s a high price to pay for a month of sloppy accounting.
A non-sufficient fund (NSF) is a nasty term and an NSF cheque cannot only cost you a high fee from banks to process, but it can hurt your credit rating. A credit guide from the federal Financial Consumer Agency of Canada states that bad cheques can stay on your record for six years.
Most of OCCA Consumer Debt Relief members are in overdraft protection due to overuse of credit cards and lines of credit and NSF cheques. When overdrafts are frequent, paying a monthly overdraft protection plan may be good value
The cost of overdraft and allowance credits will vary depending on what bank you deal with.
Typically, Canadian major banks will charge $5 if a member goes into overdraft at any point during a month. A monthly fee would cost $4 a month (plus interest on overdrawn amounts).
Like any type of insurance, the service provider scores the big bucks. Our banks are making a lot of money from service charges and overdraft protection is just another one to keep their revenue in the black and keep us spinning in a wheel of endless payments.
For more articles about how to manage personal finances and debt management, visit our blog at www.occa.ca/blog.
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