Do you know if you’ve opted into your bank’s overdraft fee program? If you aren’t sure, you might find yourself on the hook for unexpected—and unfair—fees.
If you pay for something with a debit card but don’t have enough money in your account to cover the cost, your bank can charge you a fee—typically $35—and loan you the money rather than rejecting the transaction. With an average overdraft of $20, many people are essentially being charged 175 percent interest for short-term loans—even more if banks add on additional penalty fees.
Banks collected about $30 billion in these fees last year, most of it coming from just 9 percent of customers—typically more vulnerable populations like the elderly, young and low-income people. "There are similarities between overdrafts and payday loans," Richard Cordray, the director of the Consumer Financial Protection Bureau, told a reporters' roundtable yesterday. The CFPB is a new agency, created in 2010 to make sure there’s a fair marketplace for consumer credit. "Both serve consumers who are strapped for cash and who feel they need short-term help."
Many banks weren’t transparent about overdraft fees initially, and people wound up getting charged when they didn’t expect to be, especially because of a tricky practice in which the banks would reorder charges to process the largest bills first, making it more likely that their customers would rack up more than one overdraft charge. This manipulative process continues today.
After rising complaints about these practices met massive public antagonism toward banks after the crash, the Federal Reserve set rules about overdraft fees in 2010—namely, that banks must allow customers to opt into the program. Critics allege that banks are using misleading marketing to get people to opt in, and that the underlying unfairness of overdraft fees hasn’t been eliminated.
Now, the CFPB is launching an inquiry into overdraft fee practices. They’re proposing that banks include a “penalty box” on their monthly statements to explain clearly and directly to consumers how fees are affecting them and what they can do about it. This kind of regulation—giving regular people the tools to make smart decisions—is a hallmark of the CFPB’s philosophy.
While the CFPB investigates the current state of the overdraft world, they’re encouraging people to weigh in with their experiences and to check with their banks to make sure they understand if they’re part of an overdraft protection program and what happens if their checking account runs low.
Don’t get caught paying $40 or more for a $5 cup of coffee. Consider your opt-ins.