The $900 Bad Money Habit: Serial Overdrafting

Anna Williams
Posted

overdraft fee17,000% APR. You’d never sign on for a loan with an interest rate like that, would you?

Well, the truth is that each time you incur a banking overdraft fee, you essentially are. Let’s break it down.

According to a new report by the Consumer Financial Protection Bureau, the majority of overdrafts are for purchases of $24 or less and are repaid, on average, after three days—but cost the consumer a steep $34 penalty. In other words, every time someone tries to withdraw more money than is currently sitting in their checking account, they’re basically signing on for a short-term loan from the bank to cover that shortfall. A loan that just happens to carry a 5-digit interest rate.

Unsurprisingly, these shocking stats have the CFPB and other consumer advocates concerned—especially since the majority of overdrafters pay more for the fee than for the actual item they are trying to purchase. What’s more, a small minority of banking customers (just 8%) bear 75% of all charges, the report found. These serial overdrafters tend to be lower-income Americans, younger people and those without a financial cushion.

The CFPB does point out that some strides have been made in recent years to rein in these wild fees. In 2010, for example, federal regulators began requiring banks to make overdraft protection an “opt-in” service rather than automatic—meaning that unless they chose otherwise, consumers could simply have their purchase denied instead of racking up hefty fees for the quick loan.

If you’re not so keen on incurring these charges yourself, read up on your bank account’s overdraft guidelines—studies have shown that most consumers are actually unsure about their own and many banks have tweaked their policies after 2010′s regulatory changes. If you are currently enrolled in overdraft protection, consider opting out. As CFPB Director Richard Cordray said in a press release, “consumers who opt in to overdraft coverage put themselves at serious risk when they use their debit card.”

  • RS

    I used to get dinged by those fees as well. My solution: create a savings account with the same institution and have the checking account dip into the savings account if there is a shortfall. My bank offers this although I’m not sure if all institutions do. (Note: this savings account is really my allowable discretionary spend plus some short-term savings for moments when I treat myself to items like a mini-shopping spree. My real savings are at a separate institution entirely).

  • WillyRave

    All
    financial advisors repeat in unison that people need to be very attentive when
    signing an agreement with a bank. But it is also truth that people are
    responsible for making payments on time especially when they find payday installment loans online.