Overdraft fees: A $15 billion problem for consumers

Young man at home with his feet up on the couch, calling his bank about an overdraft fee.Image: Young man at home with his feet up on the couch, calling his bank about an overdraft fee.

In a Nutshell

Overdraft fees continue to be a huge financial burden on consumers, but by taking smart steps to protect yourself, you may be able to avoid them in the future.
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Question: Have you ever been charged an overdraft fee by your bank?

If you’re nodding right now, you’re not alone. Data from the Consumer Financial Protection Bureau reveal that in 2016, U.S. consumers paid a staggering $15 billion in overdraft and bounced-check fees, which happen when someone tries to make a purchase without enough money in their account to cover the transaction.

In 2010, a new Federal Reserve rule prohibited financial institutions from charging customers overdraft fees on ATM or debit transactions, unless the customer opts in to their overdraft protection, which generally allows them to make debit card purchases or ATM withdrawals even if there’s not enough funds in the account. The rule was supposed to, among other things, cut down on the amount of overdraft fees that banks were charging consumers.

But what’s concerning is that a 2014 Pew Charitable Trusts survey found that more than half of Americans (52 percent) who overdrafted didn’t recall opting in for overdraft protection.

So, what are some steps you can take to reduce the risk of overdrafting your account and incurring steep fees?

Overdraft protection: It’s complicated

On the surface, overdraft protection sounds like a benefit. Don’t have the money in your account to pay for something? With overdraft protection, you can still pay for what you need or want, up to a limit agreed upon with your provider.

However, should you ever overdraft, you may incur an overdraft fee and even a one-time fee can be substantial — the CFPB reports that the overdraft fee is typically $34 per transaction.

More worryingly, a 2014 CFPB study found that the majority of overdraft fees were incurred on transactions of $24 or less, and the Pew study found that in 2013 “younger, lower-income, and nonwhite account holders” were among those who were more likely to pay an overdraft penalty.

Like many Americans, I’ve overdrawn my checking account before. Recently, my husband forgot to transfer money to our shared checking account to pay rent. When our landlord attempted to process the check, our account was overdrawn and we got hit with a $34 overdraft fee.

But it didn’t stop there — my landlord was also hit with a nonsufficient funds fee for trying to process a bounced check, which she then passed on to us. In all, we ended up paying nearly $70 in fees, which was a sobering lesson in keeping an eye on our checking account levels.

So how can you avoid overdraft fees?

Fortunately, there are steps you can take to reduce your own risk of getting hit with overdraft fees.

1. Become familiar with your bank’s overdraft policies

Overdraft policies can vary widely between banks. For example, if you overdraw your Bank of America account and you remain overdrawn for five consecutive business days, you may incur a $35 extended overdraft fee (in addition to the $35 overdraft fee you’ve already been charged).

Chase, on the other hand, charges $34 for overdrawing your account but won’t charge this fee if you’ve overdrawn by $5 or less. However, they’ll charge an extended overdraft fee of $15 each time your account is overdrawn for at least five consecutive business days, regardless of how much you’ve overdrawn by.

It’s important to be aware that you may still get hit with a fee even if you agree to overdraft protection. Under overdraft protection, you typically pay less if you overdraw your account and your bank transfers money from a linked account to a checking account. For example, if you opt-in to Bank of America’s Overdraft Protection Service and you overdraw your account, you may incur a $12 fee for each transfer of funds to cover overdrafts from your account. Wells Fargo charges $12.50 under its overdraft protection service.

Some banks reorder transactions to hit you with multiple overdraft fees. Imagine that you only have $100 left in your checking account, and you make a series of purchases in one day: $5, $75, $20 and finally $100. Your purchases add up to $200. Instead of being charged with one overdraft fee for that last $100 transaction, banks can reorder the transactions to process the biggest one first instead of doing them chronologically. If the bank processes the final $100 charge first, then each charge over that will get its own overdraft fee. Suddenly, instead of being charged one overdraft fee, you’ll be hit with three separate fees even if you really only overdrew your account one time.

Right now there’s a lot of debate about this practice. Until it’s officially banned, you should keep a sharp eye on your accounts. The best way to avoid this happening to you is by making sure that your account doesn’t have overdraft protection. Failing that, try your hardest to not overdraw your account.

By being familiar with your bank’s policies, you can learn ways to avoid fees, or possibly take immediate action to avoid fees if you overdraw.

2. Sign up for low-balance alerts

Most major banks, including Chase, Citibank, U.S. Bank, Wells Fargo and Bank of America, allow you to sign up for low-balance alerts. Typically, this allows you to set a dollar amount that will trigger the alert and your bank will send the alert by either text message or email.

By being aware of your balance, you may be able to avoid making charges that exceed how much you have in your account.

3. Opt out of overdraft protection

Even if you’re one of the 52 percent of Americans who doesn’t remember signing up for overdraft protection, you may opt out at any time. By opting out, you’ll be declined on debit card payments and ATM withdrawals if they exceed your balance.

However, even if you opt out, you may be charged with a nonsufficient funds fee (which may be as high as an overdraft fee) if you send a check or an automated clearinghouse transaction that exceeds your account balance.

4. Switch to an account with no overdraft fees

The five biggest banks in the U.S. all offer some accounts that prohibit overdrafting, including Bank of America, Wells Fargo and Chase. These are called lower-risk accounts and they are typically not prominently advertised on banks’ websites.

You have options with other banks too. For example, if you link your Ally Bank money market or online savings account to your checking account, Ally Bank will automatically transfer available funds to your checking account if you overdraw for no extra cost. Even though this option is available, remember that it only works if you have enough in your savings account to cover the overdraft. Otherwise, you’ll still be charged an overdraft fee.

Before you decide to invest your money into one of these accounts, make sure you familiarize yourself with all the fees they may charge.

Bottom line

Overdraft fees continue to be a huge financial burden on consumers, but by taking smart steps to protect yourself, you may be able to avoid them in the future.