The Forever Trap of Overdrafts

One of the most convenient, but so financially deadly, traps is to have overdraft protection on your chequing account. It allows you to go below zero without fees, or the chance of bouncing a cheque, but comes at a very high price – in a number of ways.

Firstly, an overdraft will almost certainly become a permanent debt, because it now pretends you can go to minus $500 or minus $1,000 – forever. But it’s not something most people really consider “debt.” And it also gets used almost every month, because we never seem to get out of it, kind of like quicksand.

The convenience comes at a high price of around 20% interest. That is one of the biggest reasons banks aggressively sell it. Yes, it does protect you from an NSF charge, but can’t you simply learn that zero in your account is the end of spending, instead of going in the hole over and over again?

About six months ago, I started working with someone, OK, more like bugging him, to get his $1,000 overdraft cut off. But it was, and will be for you, very hard to get yourself out of that hole. A great plan, if you finally want away from this almost permanent debt, is to do it in stages. The plan was to get it down to below $500 and then go to the bank and cut the limit of the overdraft to $500 as well.

That was a great way to assure the overdraft was being reduced and not going up again. Yes, the teller will claim they cannot do that, you have to see a loans officer, etc. That’s nonsense. It’s one press of the button to reduce it. The reason they want you to see a loans officer is because they want to SELL you on keeping it way up there. That’s how they make money! Their job is not to help you, but to help their financial statement. If you get that push back, tell them: Fine – just close the account then. At that point, they’ll blink and cut the overdraft down. It’s YOUR money and you are the customer. It’s what YOU want and not what the bank wants!

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