via Moak: Banks pulling in billions in overdraft fees, clarionledger.com, 3/7/2016
A generation ago, overdrawing your checking account could mean big trouble. Writing a check you couldn’t cover would subject you not only to fees from the merchant, it could also mean embarrassment, shame and possibly legal trouble. Those things are still true, but some consumers in recent years have been using a different approach — paying the bank to “cover” those overdrafts, whether unintentional or not.
A couple of decades ago, banks began offering services to “protect” account holders from the embarrassment of having to explain yourself to the neighborhood grocery store or drugstore. For the privilege of having the bank provide this service (known as NSF, or non-sufficient funds services), banks began charging fees — sometimes, steep ones. Our bad money management or math errors, it turns out, can cost us a lot.
According to a new report detailing NSF revenue during 2015 from the Consumer Financial Protection Bureau (CFPB), the nation’s 628 largest banks took in $11.16 billion in overdraft fees during 2015, amounting to about 8 percent of their net income. (That doesn’t count fees charged by many smaller banks or credit unions.)
According to the CFPB, institutions are required to file detailed quarterly public financial statements, known as Call Reports, with the Federal Financial Institutions Examination Council (FFIEC). “Until last year, banks did not break out consumer overdraft and NSF fee revenues; they combined these fees with other fees into what is called “deposit service charges,” noted the CFPB’s Gary Stein in a blog post. “For the first time in 2015, banks with over $1 billion in assets and that offer consumer deposit accounts began also reporting certain categories of fees — including overdraft and NSF fees— earned on consumer accounts separately from other deposit service charges. For the fourth quarter of 2015, there were 628 banks subject to this new requirement.”
Strictly speaking, an overdraft occurs when your account lacks the funds to cover checks, electronic debits, ATM withdrawals or other transactions that hit your account. For example, if you have $50 in your checking account, and you use your debit card to buy $35 worth of gas, then $20 in groceries, your account will be overdrawn by $5. The bank can choose to “cover” that overdraft — and if it’s a rare occasion for you, may elect to do it as a courtesy. But banks can and will charge you fees for NSF services, and it could get expensive (in some cases, much more than the amount of the overdraft). You may incur the fee several times in a day, resulting in hundreds of dollars of fees in a single day in some instances. Controversy (and class-action lawsuits) have arisen over the way fees are charged, even the order in which charges hit the account.
In 2010, new regulations went into effect, requiring that institutions get your consent to provide NSF services, and allow you to “opt out” of these programs if you want. According to the law, if you have opted out, you cannot be charged for most overdraft transactions using your debit card; it will just be declined when you try to use it. However, if you’ve written actual checks, or allow merchants to make automatic withdrawals against your account, you can still be charged fees for those items if they hit your account and there aren’t available funds. If the bank chooses not to cover them, you will still likely be charged fees (in addition to whatever the merchant charges you.) For more on this, visit https://www.fdic.gov/consumers/overdraft/.
To help consumers reduce or avoid overdraft fees, Stein offers this advice:
- Consider opting out. “Your bank or credit union can’t charge you a fee for an overdraft with your debit card or at an ATM unless you “opt-in” to overdraft coverage for these transactions,” Stein notes. Remember, though, your debit card will be declined if there isn’t enough in the account; you’ll need to decide which is worse; the embarrassment or inconvenience of having your card declined, or being charged the overdraft fees.
- Link your checking account to a savings account. If you overdraw your checking account, your bank will take money from your linked savings account to cover the difference. You may be charged a transfer fee when this happens, but it’s usually much lower than the fee for an overdraft. (And the law also restricts the number of such transfers, so it’s not an option you can use often.)
- Apply for a line of credit or linked credit card. You may have to pay a fee when the credit line is tapped, and you will owe interest on the amount you borrowed, but this is still a much cheaper way to cover a brief cash shortfall.
- Track your balance. If your account balance is consistently low, it’s a good idea to sign up for low-balance alerts. Make sure to account for automatic transactions, such as a recurring withdrawal by a utility or insurance company. You also need to know when the funds you have deposited become available for your use.
- Shop around. Bank fee programs vary, and smaller, community-based banks or credit unions may offer better fees to get your business. Banking is a highly-competitive business, and there are lots of options.
Ultimately, the best way to avoid overdraft services is not to need them at all. Awareness of your available funds, protected by a “cushion” in case you make a mistake, means that you won’t have to worry about it in the first place.