If you aren’t aware, the Center for Financial Resources provides a variety of financial education classes, most of them for free. At the end of each class, we ask students to fill out an evaluation as a part of always improving our services. Last week I got some new feedback I had never gotten before. When asked to share something they learned and will use, one client responded with “Screw the banks!” Except their exact quote just a bit more ‘colorful’.
Let me be very clear, this is not a concept I in any way advocated for in my class. It was, unfortunately, one of those moments when one student shared a story and someone else only heard what they wanted to hear. “What kind of a story that would elicit such a response,” you ask? Well, let me share….
This particular individual had opened up a new checking account with a debit card. Knowing they were not very good at managing money, they specifically asked if the bank would allow the client to overdraft their account with the debit card. According to this individual, the bank representative told them they would not be able to overdraft.
Shortly thereafter, the individual got their bank statement in the mail which showed they had, in fact, over drafted their checking account. As is usual, they not only owed the extra money, but now an overdraft fee as well. As they shared, one other student in the class spoke up and claimed the bank had done the same to them too.
To make a long story short, the first individual sharing their story was so mad at the bank that they decided to ignore the charges and quit using the bank. What started out as a $5.00 overdraft had now, due to penalties and interest, built up to a debt of over $600.00.
While the emotional, reactionary side of each of us may cry foul at such a situation, let’s look at how this came to be.
First, the overdraft – When you use your debit card as a debit card, the card processor may check to see if you have the available funds at that moment. The way the system works, however, is that the transaction may not actually post to your account for a day or two, depending on their system. If you make a series of purchases in quick succession, they may each find enough funds at the time of purchase, but as they post and the money is actually withdrawn from your account, it will over draft your account.
Second, the fees – While $600 may seem like a lot for a mere $5 over draft, this is most likely a very legal amount. First, the $600 had been accumulating over several years. Second, due to the tight regulation on the banking industry, the only way they can charge such fees is if the consumer agrees to the terms in writing. That’s right. All that fine print that most of us just skip over when we sign paperwork is us actually giving the bank, lender, or other business explicit permission to charge us such fees. They only do it because we have allowed them, in writing, to do it.
So what are we to do?
Ideally, we are going to prevent this same situation from happening to us. Read the paperwork before you sign it. If you don’t understand, ask for an explanation. Know what you are getting yourself into.
The other method of prevention has unfortunately been largely lost as people went to carrying just a debit card rather than an entire checkbook. That would be the register. We don’t keep track of what we have spent. We just log in and trust the bank to present that accurately. But again, that amount only shows what has already been taken from your account, not the pending purchases that haven’t posted to your account yet. You need to keep track of these yourself and then balance it against the bank’s statement, whether that be on paper or online.
I understand that life happens. Having had two accounts at the same bank, I once used the wrong debit card for several purchases. When I thought I was using one account, I was actually clearing out my other account and then over drafting that account by nearly $200. Thanks to a little bit of awareness (and perhaps a measure of dumb luck), I caught the mistake. I quickly shuffled funds from one account to the other and avoided any finance charges that may have been applied.
When life does happen, we cannot simply stick our heads in the sand and ignore it. Debt does not go away when you do that. Should life happen and you end up with charges like the afore-mentioned student, just deal with it before it explodes into something you can’t handle.
Here are the steps I would recommend for dealing with outstanding debt:
- Get your current budget figured out. Know exactly how much income and expenses you have in a month. Being aware and able to communicate this information with your creditors may help your negotiations.
- Contact your creditors. Unfortunately it is all too common that people who owe money simply disappear as far as the lender knows. You will be well ahead of the curve and will build goodwill with those you owe just by contacting them and offering to discuss the situation. While they probably won’t simply make the debt go away, the goodwill you build will help in negotiating and reaching a compromise.
- Get some objective advice. You are obviously financially and emotionally invested in the situation. The creditor has a financial interest of their own. An independent third party may well provide some clarity that will greatly help you move forward with your situation. A certified consumer credit counselor can look at your specific situation, listen to your concerns, and help you find the best path to take towards paying off your debt. They may even be aware of options you aren’t.
- Make a plan and carry through. If you reach an agreement with a creditor, stick to it. We have had clients that reach an agreement and then, for whatever reason, decide not to hold up their end. Months and even years later when they again try to work with the creditor, they now have no credibility and will often receive no cooperation whatsoever. Even if you need to change the plan, stick with it and always communicate with your creditors as to what is happening.
I’ll be honest with you. A part of me would like to go back, find the person that gave me that feedback, and just shake them…. a lot. Then again, that probably wouldn’t help much and I may well find myself looking for new employment. All I will do for now is encourage you to take responsibility. However you ended up in your situation, take responsibility for addressing the problem and improving your situation.
If you are at that point of needing an objective perspective, the counselors at Center for Financial Resources are happy to help. With seven locations across eastern South Dakota, they can usually meet with you in person. If not, our counselors can work over the phone as well. All you need to do is make the call and schedule an appointment.
And I guess you could cuss out the bank too, but it probably won’t help much.
written by Breck Miller
images courtesy freedigitalphotos.net