Overdrawing Your Account? Small Debit Purchases Lead to Expensive Overdraft Charges
The Consumer Financial Protection Bureau (CFPB) released a report that raises concerns about the impact of opting in to overdraft services for debit card and ATM transactions. The study found that the majority of debit card overdraft fees are incurred on transactions of $24 or less and that the majority of overdrafts are repaid within three days. Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent annual percentage rate (APR).
Chase Bank ATM machine at CVS Store, Wikimedia Commons
"Today’s report shows that consumers who opt in to overdraft coverage put themselves at serious risk when they use their debit card," said CFPB Director Richard Cordray. "Despite recent regulatory and industry changes, overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error. Overdraft fees should not be 'gotchas' when people use their debit cards."
The Overdraft Data Point is available at: http://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf
An overdraft occurs when a consumer doesn't have enough money in his or her checking account to cover a transaction, but the bank or credit union pays the transaction anyway. This practice can provide consumers with needed access to funds. Financial institutions typically charge a high fee for this service in addition to requiring repayment of the deficit in the account. A consumer can overdraw his or her account through checks, ATM transactions, debit card purchases, automatic bill payments, or direct debits from lenders or other billers.
In 2010, federal regulators put in place a new "opt in" requirement that depository institutions obtain a consumer's consent before charging fees for allowing overdrafts on most ATM and debit card transactions. Opting in for overdraft coverage does not apply to checks or automated payments, known as Automated Clearing House (ACH) payments. For these, the bank can choose to not cover the transaction and reject the check or automated payment; this usually results in a non-sufficient funds (NSF) fee. Or, if the bank chooses to cover the difference, it can charge the consumer an overdraft fee – regardless of whether that consumer opted in for the debit card coverage.
In addition to the regulatory changes, financial institutions have also updated their overdraft policies in recent years. For example, some banks and credit unions do not charge an overdraft fee if the consumer is only overdrawing on his or her account by a small amount, such as $5. Some institutions also cap the number of overdraft and NSF fees they will charge on an account on a single day.
Today's study raises concerns that despite these recent changes, a small number of consumers are paying large amounts for overdraft, often for advances of small amounts of money for short periods of time. Today’s report finds that among the banks in the study, overdraft and NSF fees represent more than half of the fee income on consumer checking accounts. The study found that about 8 percent of accounts incur the vast majority of overdraft fees.
Specifically, the report found:
· Consumers use debit cards nearly three times more than writing checks or paying bills online: The most common way consumers access money in their accounts is through debit card transactions. The study found that consumers use their debit cards for purchases about 17 times a month; in comparison, consumers, on average, write checks fewer than three times per month, and they make automatic bill payments a little more than three times per month. Consumers who are opted in for overdraft services use their debit cards even more frequently, at 24 times per month. The wide use of debit cards can mean more fees for those who opt in for overdraft.
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