Why your overdraft protection is costing you
A new federal study shows how banks pile charges onto their customers, and offers ideas on how to avoid those charges.
A report released today by the Consumer Financial Protection Bureau shows that those consumers who've opted to have overdraft protection pay significantly more money to their banks than those who don't.
But that doesn't mean it has to stay that way. For one thing, not every financial institution operates in the same way. And those who have faced overdraft and over-limit charges can make some adjustments to avoid the costs -- including opting out of overdraft protection.
"Consumers need to be able to anticipate and avoid unnecessary fees on their checking accounts. But we are concerned that overdraft programs at some banks may be increasing consumer costs,” CFPB Director Richard Cordray said. "What is often marketed as overdraft protection may actually be putting consumers at greater risk of harm."
Consumers who write a check or spend more than is available in their account at the time face a charge for an overdraft because the bank essentially covered them, providing what amounts to a short-term loan. A bank can also return a check or payment when the money isn't available and assess a fee for insufficient funds.
Fees for overdraft and insufficient funds have become a significant source of revenue for financial institutions -- accounting for "60% or more of consumer checking account fee income," the CFPB found.
Bank and credit union customers were given the choice starting in 2010 of whether they wanted opt-in to overdraft protection. The main difference for most consumers on a day-to-day basis (in addition to the fees) is that those who don't have overdraft protection could have a debit card transaction rejected at the register. Someone with overdraft protection could ring up transactions even though their account couldn't cover them and be hit with multiple fees -- which at times could end up being more costly than what they bought.
Most consumers did not opt in, although at some banks a significant number did. Some financial institutions reported more than 40% of new customers chose to opt-in in 2011, the CFPB said. The agency found that when those consumers who were regularly getting assessed the fees opted out halfway through the year they saved on average $450 over the rest of the year.
The average consumer who is assessed overdraft charges pays $225 over the course of a year, the report said. The median overdraft charge at the biggest banks is $34.
And, the CFPB said, those who opt in are at greater risk of having their accounts closed by their financial institution.
To further complicate matters, fees and policies on overdraft vary widely from bank to bank -- including the order in which they post transactions. Some banks, for instance, will post the biggest dollar amount item first -- causing multiple transactions behind it to be considered overdrafts. Had their smaller transactions processed first, it could have resulted in only the single, large transaction being an overdraft and thereby resulting in one charge rather than multiple charges. Some institutions will charge a fee for any transaction that results in an overdraft while others limit the number of charges and the dollar amount that result in such fees being assessed.
The Pew Charitable Trusts has been advocating for consumers to have better understanding of these fees through simpler bank disclosure forms. They have been making some headway, getting several major banks to adopt their model form.
And Consumers Union, along with a collection of other consumer groups, want to see the CFPB provide greater protection to those consumers who do choose to have overdraft protection. Among the changes they want to imposed:
- Easy-to-understand explanations of checking account fees and policies,
- Limiting fees to what would be "reasonable and proportional to the financial institution’s costs."
- Capping how many overdraft charges can be assessed in a day or a year,
- Stopping financial institutions from altering the order of transactions so they can collect the most fees.
"Regulatory policy and oversight should not impede a bank’s ability to offer a variety of overdraft payment services to meet their customers’ financial needs," the group said. "Consumers must retain the ability to access overdraft services that best fit their unique financial needs and avoid being locked into an ill-fitting ‘one size fits all’ overdraft program."
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Additionally -and contrary to many poorly-researched articles- I have many more free ATM's than I did with my bank: 70,000+ nationwide including those in every 7-11, Target, and Costco. I have NO debit card swipe fees. I get 0.6% savings, 0.1% checking, and 1.5% CD interest. I'm required to either have $1000 in all accounts OR have my pay, pension, or Social Security check automatically deposited to get such treatment. I pay absolutely NO nickel-and-dime fees like Internet use or automatic payment use, etc.
Finally let me add three things:
1) Most credit unions will accept virtually anyone as a member even if it has a name like State Employees Credit Union (SECU). I was never a State Employee, but I qualified both by being related to someone with a SECU account and being a graduate of a Maryland public 2 or 4 year college.
2) Credit Unions are federally insured to the same extent banks are.
3) You're generally throwing your money away in a bank.
How about just being responsible and not spending what you don't have? How is this the banks fault?
Also, there is a difference between overdraft PROTECTION and overdraft COVERAGE. Coverage should be the terminology used in this article. Overdraft protection is when your account is linked to another type of account that it would pull from if you spent more than you have. With all the different ways to keep any eye on your account nowadays, ( i.e. mobile banking, internet etc.) including the most old fashioned, yet fool-proof, checkbook register, there is no excuse to overdraw your account. If you do it on purpose, you should be penalized. Is there no idea of responsibility in this world anymore???
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