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What Bank Overdrafts Really Cost You

Oops, you’ve done it again: That $24 lunch you put on your debit card hit your account the same day as a few other bills. Now you’re just over the amount in your account and “covering yourself” with overdraft protection will cost you $35.

According to the Consumer Financial Protection Bureau (CFPB), the majority of debit card overdraft fees are incurred on transactions of $24 or less and the majority of overdrafts are repaid within three days. Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000% annual percentage rate (APR).

Few consumers would consider that to be a good deal.

Count the Ways, and Fees

An overdraft happens when a consumer doesn’t have enough money in his or her checking account to cover a transaction, but the bank or credit union pays the transaction anyway. This practice can provide consumers with needed access to funds, but it’s not free.

Financial institutions typically charge a high fee for this service in addition to requiring repayment of the deficit in the account. A consumer can overdraw his or her account through checks, ATM transactions, debit card purchases, automatic bill payments, or direct debits from lenders or other billers.

Protecting Your Purse Strings

In 2010, federal regulators put in place a new “opt in” requirement that depository institutions obtain a consumer’s consent before charging fees for allowing overdrafts on most ATM and debit card transactions. Opting in for overdraft coverage does not apply to checks or automated payments, known as Automated Clearing House (ACH) payments.

For these, the bank can choose to not cover the transaction and reject the check or automated payment; this usually results in a non-sufficient funds (NSF) fee. Or, if the bank chooses to cover the difference, it can charge the consumer an overdraft fee – regardless of whether that consumer opted in for the debit card coverage.

In addition to the regulatory changes, financial institutions also have updated their overdraft policies in recent years. For example, some banks and credit unions do not charge an overdraft fee if the consumer is overdraws the account by a small amount, such as $5. Some institutions also cap the number of overdraft and NSF fees they will charge on an account on a single day.

Deep Pockets

The CFPB has raised concerns that despite these recent changes, a small number of consumers are paying large amounts for overdraft, often for advances of small amounts of money for short periods of time. Among banks recently surveyed by CFPB, overdraft and NSF fees represented more than half of the fee income on consumer checking accounts. They also found that about 8% of accounts incur the vast majority of overdraft fees.

Specifically, the CFPB says it found:

  • Consumers use debit cards nearly three times more than writing checks or paying bills online.
  • Majority of debit card overdraft fees incurred on transactions of $24 or less.
  • More than half of consumers pay back negative balances within three days.
  • The median overdraft fee at the banks studied was $34.
  • Nearly one in five opted-in consumers experience overdrafts more than ten times per year.
  • Opted-in consumers pay seven times more in overdraft and NSF fees per year.

“Despite recent regulatory and industry changes, overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error. Overdraft fees should not be ‘gotchas’ when people use their debit cards,” says CFPB Director Richard Cordray.

The best protection? It sounds simple, but keep a record of all your transactions and ensure your outflows of cash are in sync with your inflows (i.e., your paydays or other deposits, etc.) That being said, even the most organized finances can have a slip up or two—especially if you have a joint account or have automated payments set up. That’s why it’s important to make sure you understand the overdraft policies and fees for your accounts, and shop around if you feel they are unfair.

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