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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.

By Mitch Lipka Jun 11, 2013 4:10PM
Image: Checkbook (© Corbis)Your checking account can be a big source of profit for your bank. That's good for the bank and bad for you -- since their profit is coming out of your account. How they do it: fees and charges, particularly for overdrafts.

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.
The Independent Community Bankers of America, representing about 7,000 small banks, issued a statement saying they don't want to see the government impose restrictions.

"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."

More from MSN Money:

Jun 12, 2013 10:52AM
For the average person, banking with a bank instead of credit union is costing them.  Many credit unions including mine, SECU of Maryland, have NO overdraft fee if savings can cover it!

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.

Jun 13, 2013 6:37PM

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???

Jun 14, 2013 1:50AM
Never opt in for overdraft protection. At my credit union ( SUNMARK )  if I write a check that has insufficient funds in the checking account , it automatically takes money (which could be as little as .01 cents) from your savings account and charges a fee of $3. Of course you could get hit for a number of these, but its still cheaper than overdraft fees. As far as DEBIT CARDS go, they can shove them. I still write checks. Naturally you always need to leave money in your savings account as a "buffer". By the way , now all of the big banks are pushing credit cards and balance transfers again with a hefty 3 % fee of the balance transferred. The 3 % is the upfront interest you pay. Its just like paying "points" on a mortgage. Best thing to do is cut up all of your credit cards and keep only one with a "Low" credit line so you do not get into trouble. Then never buy anything that costs more than you can pay off in full before the credit card bill shows up. If you must buy something, DON'T, think about it, and the chances are good you will not buy it. Sleep on it. If you buy online, do not complete the purchase and you will forget about it. DO NOT BUY any new cars if you want to get out of DEBT.  Instead use an amount of money EQUAL to what amounts to two car payments and use that amount of money to buy a set of tires, a set of brake discs, a set of brake pads (ceramic) a "serpentine" drive belt or two if needed, a new upper and lower radiator hose, and clamps, new heater hose and clamps, two gallons of full strength antifreeze and two gallons of distilled water, an air filter, 5 quarts of synthetic oil (avoid mobil one since it has the lowest rating), Amsoil (bought online) is the best you can buy. Buy Bossch extended oil filter (costs $10-13 ) pricey but the best (shop amazon for Bossch oil filters) for air filters buy K & N permanent oil filters (one million mile warranty). So for $700 you can do a lot to a car , make your existing car go for another three years minimum. Two car payments are better than 48 or 60 car payments. Go to advance auto for part numbers, or autozone. Buy synthetic valvoline oil 5w-20 , 10w-30 from walmart (cheapest) or Amsoil online. Never pay for "Road Hazard Warranty on tires (you will never use it). If you want to pay for it on one tire do that but not on four tires (its like buying an extended warranty for a car (you will probably never use it) .
Jun 14, 2013 2:40AM
Karl Marx said Banks were "parasitic". He was correct on that. Today you cannot even get even 1 % interest on your savings.  In 1952 we used to get 3 % interest on our school bank accounts.  Monday was bank day and everyone put a dime in their bank account. It was the Governments way to instill the savings idea in kids. Banks give you less than $100 a year on a deposit of $100,000. Then they take your money and loan it out to people buying cars and charge them up to 20 % interest. They issue credit cards that charge you up to 29.99 % interest (why not just say 30 % interest). Banks typically "bleed" people dry of their income since its the only place that people can borrow money unless they go with the auto dealers financing. Credit unions are not much different. Credit unions used to be a lower way to finance a purchase but even they have followed the banks method of charging all kinds of fees for everything. Banks "feed" off of people who fall for "Madison avenue" advertising and buy WAY TOO much automobile or truck. Or who buy TOYS like boats and trailers and motorcycles. You cannot save any money by buying a motorcycle. Why not? The tires cost as much if not more than a car or truck tire and they only last as little as 5,000 to 8,000 miles if you are lucky. Maintenace is $75 to $100 an hour and the average person cannot change a tire. It can cost about $800 to get two new tires put on a bike after only 6,000 miles. Any scheduled service on a motorcyle can cost as much as $ 900 to $1300. How often do you pay that money for a car. Motorcycles need valve adjustments which are expensive, cars and trucks do not need valve adjustments. The definition of a BOAT is  " A Hole in the ocean or Lake that you throw money into every year. To determine the true cost of a new automobile, take the price you pay plus sales tax and interest if financed and then divide that figure by the number of miles driven.  If you pay $40,000 for a car (which includes sales tax and finace charges and drive it for 100,000 miles then that car costs you 40 cents per mile.  So for every daily use of say 80 miles, it costs you $32 a trip just for the steel, glass, and vinyl. The cost of gas, oil, insurance, tires, maintenance don't count since every car needs these items. The point is if you only keep the car for say 50,000 miles then your 80 mile a day use costs you $64 a day just to drive that car plus gas,insurance, maintenance etc. 
Jun 13, 2013 9:00PM
for one not everyone knows they are overdrawing. my bank charges me fees and withdrawls them multiple times a month sometimes "accidentally". and if the bank takes out fees and you go to use 3 dollars and theres only 2 dollars in your account but you thought there was is that your fault?you then get an overdraft fee. and banks also charge a fee for taking from one account and putting it in the other to cover it. as i have had that service too. i would use a credit union if i could, but where i live there arent any around that are convenient . but the fees arent always the same amount no matter what you were told when signing up. and if you overdraw your account yes you should be penalized and have one fee per transaction. but what happens is a person has lets say 100 dollars in their account. they go and spend 20 dollars . then the following day they overdraw their account by 10 dollars. rather then getting one overdraft fee for the 10 dollar overdraw,you will get 2 overdraws one for the 20 dollars and one for the overdraw .you see even though you had money in your account when you made the 20 dollar transaction the bank doesnt actually "clear"it for a couple of days. then the overdraft fee is assessed that day it clears,not from the day the transaction was made.
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