Overdraft Fees: What You Need to Know

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It happens to everyone – a deposit comes in late, or an auto-charge is larger than expected, and suddenly you are facing an overdrawn account.

Does it seem to be happening more often? According to recent reports, Canadians are paying more in bank fees than ever, especially overdraft fees. In addition, banks and credit unions have been accused of inappropriately assessing overdraft fees.

Taking the time to quickly understand how overdraft fees work, how to avoid them, and what to do if you think you’ve been overcharged can go a long way.

Overview of overdraft fees

Bank overdrafts is the term used to describe when a bank or credit union customer does not have enough money in an account to cover a transaction, according to the Government of Canada. Some financial institutions simply slap a non-sufficient fund (NSF) fee on the account.

Many banks offer “overdraft protection services” that allow customers to avoid these fees, but consumers should be wary as these programs may come with their own penalties — overdraft fees.

NSF fees are like overdraft fees in that they are levied on accounts without sufficient funds to cover pending withdrawals. There is a major difference between the two. An NSF fee is assessed when the account holder attempts to use funds not in the account, also known as “bouncing” a cheque.

An overdraft fee is assessed when an account holder debits more money than is in their account, but the bank agrees to cover the charge.

In 2019, Canadians paid, on average, $35 to major banks for a single overdraft fee, according to NerdWallet. Credit unions reportedly charged an average of $26 for each overdraft.

Overdraft ‘protection’ programs

Couched in customer service terms, account holders who agree to take part in overdraft protection programs do not have to face the embarrassment of having their debit card being declined if they happen to run out of money in their chequing accounts. They may also avoid late fees because the bank or credit union is, in essence, is agreeing to cover the discrepancy – for a fee or, perhaps, multiple fees.

Indeed, banks and credit unions are not limited to one overdraft fee. In fact, under the terms of some financial institutions’ overdraft protection programs, multiple fees may be charged each day. Getting overdraft protection may seem like a good idea, but if you’re in the positive, you’re paying for an unnecessary service.

How to avoid overdraft fees

There are a number of ways to keep track of your account to avoid an overdraft fee. Many banks allow customers to set up email alerts when their account gets to a certain level.

In addition, some banks allow customers to link their chequing account with another one that will automatically deposit money in the event of an overdraft. (Be wary, however, as this service generally also comes with a fee.)

Another way to avoid an overdraft fee is to refuse to sign up for overdraft protection or let your bank or credit union know you want to opt out. Consumers who choose this option should be aware of any recurring charges or bills that automatically withdraw money out of their chequing accounts and be sure they have sufficient funds because they can still be charged NSF fees.

If you have been charged an overdraft fee, Canadian Business says that it may be worth it to contact your bank or credit union to see if they will reverse the charge, especially if you are facing a challenging financial situation or the overdraft was an honest mistake.

Are overdraft fees legal?

Banking laws in Canada allow financial institutions to charge overdraft fees. However, overdraft protection services offered by banks and credit unions are usually subject to limitations according to the institution’s own terms and conditions, including how many overdraft fees a bank can charge.

In addition, some banks and credit unions have been accused of charging excessive or exorbitant overdraft fees.

For example, TD Bank is facing a lawsuit filed in February in Ontario saying that the bank charged multiple fees on a single transaction.

Financial institutions have also been accused of reordering transactions from the largest to the smallest to maximize the number of overdraft fees they can charge.

Several credit unions in British Columbia have been accused of charging overdraft fees that amount to “criminal interest.”

The man who filed that lawsuit, claimed that the credit unions’ overdraft fees amounted to a rate of over 1000% if they were compared to interest on a loan. The man alleged that these financial institutions had violated a provision of Canada’s Criminal Code prohibiting excessive interest rates on loans – also known as “loan sharking.”

Ultimately, B.C. Courts agreed with the man, rejecting the credit unions’ attempts to dodge the class action in 2019. 

If you think you have been subjected to excessive or unfair overdraft fees, Top Class Actions makes it easy to obtain a free review of your situation by lawyers who understand Canadian banking laws to determine if you qualify to take legal action.

About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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