Question: Have you ever been charged an overdraft fee by your bank?
If you're nodding right now, you're definitely not alone. An SNL Financial and CNN Money study found that in 2015, the three biggest banks in America (JPMorgan Chase, Bank of America and Wells Fargo) earned a staggering $6 billion from overdraft and ATM fees alone - about $25 per adult in the United States.
In 2010, a new Federal Reserve rule generally prohibited banks from automatically enrolling customers into overdraft protection, which was, among other things, supposed to 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 over half of Americans (52 percent) who overdrafted didn't recall opting in for overdraft protection, which is when your bank temporarily allows you to make debit card purchases or ATM withdrawals even if you don't have enough funds in your account to cover them.
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, even a one-time fee can be substantial -- the SNL Financial and CNN Money study found that the average overdraft fee is $34.
More worryingly, a July 2014 Consumer Financial Protection Bureau study found that the majority of overdraft fees were incurred on transactions of $24 or less and the Pew study found that "younger, low-income and nonwhite" account holders 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 non-sufficient funds (NSF) 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 what's next?
According to the Pew Study, the majority of people surveyed believe that overdraft fees are weighted against the consumer - over two-thirds (68 percent) would much rather be declined for a transaction than pay an overdraft fee. And 80 percent of respondents who had overdrafted believe that overdraft practices should be more closely regulated.
The Consumer Financial Protection Bureau (CFPB) may be mulling changes to current overdraft protection laws and regulations. In February 2016, Richard Cordray, CFPB director, said that the CFPB is "encouraging banks and credit unions to offer the choice of enrolling in deposit accounts that are designed to help consumers manage their spending and avoid overdrafts and fees."
Ways You Can Avoid Overdraft Fees
While changes to the banking overdraft system may not be immediately around the corner, there are steps you can take to reduce your own risk.
1. Become familiar with your bank's overdraft policies.
Overdraft protection policies can vary widely between banks. For example, if you overdraw your Bank of America account and you remain overdrawn for five or more 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 hand, charges $34 for overdrawing your account but won't charge this fee if you've overdrawn by $5 or less. They also give you a chance to avoid the fee if you cover the overdraft before the end of the business day you overdraw. However, they'll charge an extended overdraft fee of $15 if you remain 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 if you overdraw your account and your bank transfers money from a linked account to a checking account. It's typically less than an overdraft fee - for example, Bank of America charges $12 per incident and Wells Fargo charges $12.50.
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 --along with online services such as Credit Karma -- 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 NSF fee (which may be as high as an overdraft fee) if you send a check or an automated clearing house (ACH) transaction that exceeds your account balance.
4. Switch to an account with no overdraft fees.
Some banks offer accounts that prohibit overdrafting, including Bank of America, Union Bank and KeyBank. Others may decline to charge you an overdraft fee in specific circumstances.
For example, if you link your Ally Bank money market or online savings account to your checking account, they'll automatically transfer available funds to your checking account if you overdraw for no extra cost.
Before you decide to invest your money into one of these accounts, make sure you familiarize yourself with all the fees they may charge.
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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