Most overdraft fees result from small purchases
A Consumer Financial Protection Bureau study found that consumers often end up paying the equivalent of 17,000 percent interest when they purchase a small-ticket item and overdraw their account.
This post comes from Krystal Steinmetz at partner site Money Talks News.
A clearance pair of shoes, ticketed at $24, is hardly a good deal if you end up with a $34 overdraft fee on the purchase.
Unfortunately, that's often the case, Reuters said. A Consumer Financial Protection Bureau study found that the bulk of debit card overdraft fees are about $34, and typically occur on transactions of $24 or less, in those accounts that return to a positive balance within three days.
The New York Times reported: "If a consumer were to get a loan on those terms, that would equate to an annual percentage rate of over 17,000 percent," the agency's director, Richard Cordray, said in a call with reporters.
Not surprisingly, the study also found that young people and low-income consumers are most at risk of overdrawing their accounts. The Associated Press said:
The study found that 75 percent of all overdraft fees come from just 8 percent of bank customers. Younger Americans who frequently use debit cards are more likely to be charged fees. More than 10 percent of accounts belonging to 18- to 25-year-olds are hit with at least 10 overdraft fees a year. Nearly 36 percent of accounts belonging to 26- to 45-year-olds face at least one fee.
Most customers used to be automatically enrolled in so-called overdraft protection plans, but now customers have to opt in to these plans, which allow debit card overdrafts to go through for a fee. The CFPB is considering taking additional steps to further protect consumers from expensive, and sometimes, seemingly unfair, overdrafts. According to the AP:
One area of concern for the CFPB is that some banks process transactions by size instead of the time of their purchase. This means the banks prioritize large expenditures such as rent or auto payments ahead of smaller purchases, possibly draining accounts such that buying a cup of coffee can trigger an overdraft fee.
Banks collect $30 billion per year in overdraft fees, Bloomberg Businessweek said.
When I was in college, I unknowingly overdrew my checking account. Soon I had hundreds of dollars in overdraft fees built up, for small purchases like a $4 cup of coffee, or a $5 Subway sandwich. It took me months to get back on my feet.
Have you had experience with overdrafts?
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