Finances

Are Overdraft Fees Holding You Back?

How much did Americans spend in overdraft fees in 2016?

A jaw dropping $15 billion, according to the Consumer Financial Protection Bureau (CFPB).  Let that sink in. $15 billion in fees for spending more than you have. While we certainly already know that saving and budgeting is a problem, these fees are quite literally money thrown out the window.  The irony is not lost that those that struggle the most to provide for their families are a large percentage of the ones throwing this $15 billion at banks. With 69% of Americans having less than $1,000 in savings, the average overdraft fee of $34 is huge.

In recent years, the CFPB began to crack down on overdraft fees. Just a few days ago, Bank of America settled their overdraft lawsuit for $66.6 million.  The lawsuit alleged that BOA’s ‘extended’ overdraft fees were really just exorbitant interest rates. BOA was charging $35 when an account was first overdrawn and another $35 if it remained negative for 5 days. Technically, that first charge was for a service as they covered the charge that was made.  However, no service was provided for the second charge. Think about it this way, if you borrow $24 from the bank for 3 days and you pay the average $34 overdraft fee, it is equivalent to paying a whopping annual percentage rate of 17,000%, according to the CFPB.

This isn’t the only instance of the crackdown, see some of the other major headlines below.

First Niagara pays $2 million UDAP penalty for overdraft fees (2016)

CFPB Orders Santander Bank to Pay $10 million fine for Illegal overdraft practices (2016)

CFPB Fines Regions Bank $7.5 million for Unlawful Overdraft Practices (2015)

The inquiry from the CFPB is based mainly on 4 areas: transaction re-ordering (taking all transactions in a day and processing largest first, which maximizes overdrafts), confusing disclosures, misleading marketing, and disproportionate impact on low-income and young customers.

overdraft fees

Educate yourself

Now that you are aware of the 4 areas the CFPB is beginning to track, you can begin to keep a better eye out for misleading information.

For example, did you know overdraft protection is optional?

Oftentimes, this is in the small terms and conditions most people glaze over without a thought, leading them to opt-in to a service they aren’t even aware they accepted.  Over half of people who overdrew their accounts do not recall consenting to the service. If you opt out of overdraft protection, when you swipe your debit card it will get declined.  Note, ACH and check transactions will not fall under overdraft fees.

Understand the difference between an NSF and Overdraft Fee

As referenced above, an ACH payment is an electronic payment made through the Automated Clearing House network.  This is when you provide your routing and account number for a payment.  If you opt out of overdraft protection, you may still get charged a Nonsufficient Funds fee.  These occur when an ACH payment or check is returned because there is not enough funds in your account to cover the payment.  You will still get charged an NSF fee for these instances, even if you opt out of overdraft protection so be aware.

Review your bank or credit union’s policies

Overdraft policies differ from institution to institution.  Some won’t charge a fee if the negative balance is less than $5 or $10, some will charge a tiered fee depending on how high the charge was. Some institutions may only charge one overdraft fee per day regardless of the amount of transactions but then some will charge a fee for each transaction past negative.

Historically, credit unions were typically a better place to go, but with the changing landscape and immense competition, many are aligning business practices closer to banks so there is unlikely to be a great difference in fees. In fact, in 2016 credit unions hit a record $6.2 billion in revenue from overdraft fees, surpassing the prior record in 2015 by 5.1%.  Credit union overdraft fees have nearly doubled since 2000 bringing them on par with banks.

How to Stop Being Charged Overdraft Fees

  1. If you have a smart phone and your institution has an app, it should be one of the first things on your phone.  It is crucial to keep up with knowing what your current balances are so you don’t overdraw in the first place.  Apps are enormously convenient because you can check 24/7 and see if that $4 latte will put you over.
  2. On that note, most institutions have email and text alerts you can activate to alert you when you hit a certain balance.
  3. Start saving for that $1,000 emergency fund.  Read this post for tips on how to start budgeting successfully and begin digging out of the hole of living paycheck to paycheck. If shopping is your habit, read here too for ways to curb that urge.
  4. Visit your branch and ask to opt out of overdraft protection. This way, instead of being charged that fee, your debit card swipe will be declined.
  5. Already hit with the fee? Call your institution. Don’t just be defeated, you may be surprised how quickly they reverse this fee if you aren’t a repeat offender.  Everyone makes mistakes, fortunately, it can be reversed.
  6. If your savings and checking are at the same institution, you can link the accounts so if you overdraw your checking but you have funds to cover the purchase in your savings account it will transfer over.  Oftentimes, there is still a small fee for this but it is less than an overdraft so you are still saving money.
  7. Check out the app Dave.  For $1 a month, Dave will alert you at low balances or future expenses that put you at risk for the overdraft. They will also lend you a set amount upfront until your next paycheck at 0% interest.

Have you been stuck in the overdraft rut? What did you do to dig yourself out?

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