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Overdraft Fees and Banks

11 June 2013 by

Overdraft Fees and Banks

Today, a new study from the Consumer Financial Protection Bureau was released. The study focused on overdraft fees and banks. What that study reveals is that checking account customers are racking up hundreds of dollars in overdraft fees every year.

According to the report, the average fee is around $225.

Overdraft Fees and Banks Worries

You may recall a new Federal Reserve rule that was put into place in 2010 and designed to provide better protective mechanisms. Specifically, the rule was designed to force banks to improve the transparency of overdraft programs. These are optional services offered to bank customers. They are made available by banks and allow customers to link another account to their checking account in case they make an error and become overdrawn. Surprisingly, only about 40 percent of consumers actually opt in to their bank’s service.

The study also highlighted the wide spread among banks. For instance, some banks’ customers average around $150 a year in NSF fees while other banks report their averages are much higher – up to $300 according to some of these financial entities. But here’s where it gets a bit more revealing. The overdraft or NSF fees account for up to 60 percent of a bank’s revenue.

Remember, too, that banks were forced to change the way their systems processed numerous checks presented on accounts with too few funds available. It’s not been more than two years ago that banks would hold back on checks with lower dollar amounts. For instance, if a consumer has $500 in his checking account and there are four checks outstanding that total more than the balance, the bank would process the check with bigger dollar figure first. It’s more profit if they tack NSF fees on the other three checks versus the one bigger check’s NSF fees.

Inconsistent Policies

CFPB also says that because the policies differ greatly from one bank to another, it often results in confusion and a lack of cohesiveness in the collective banking sector. Some banks will waive the NSF fee if the check is written for less than $5 dollars. Other banks limit the number of worthless checks presented in a single day.

Those consumers who opt into the overdraft program offered by their banks do so because it eliminates the returned check fees the merchant tacks on, even if they still face the bank’s fees. It also eliminates embarrassment. The cost of escaping that embarrassment, though, can be costly. Not only that, but in those cases where epic math errors results in several bounced checks, the customer can lose count and set himself up for a repeat of the problem that got him there in the first place.

Twenty Percent of Accounts Overdrawn

Twenty percent of all checking accounts are overdrawn at least once; though there are the “repeat offenders” who consistently find themselves paying NSF fees. That number is growing, too according to the report as more banks are closing those accounts, which is legal. Those involuntary checking accounts that are closed are also twice as likely to be enrolled in the overdraft protection. Those consumers who were also considered repeat offenders but who chose not to enroll in the program saved $450 than their counterparts with the protection.

This report is likely to result in the consumer watchdog group looking into what, if anything, should be done.

Consumers need to be able to anticipate and avoid unnecessary fees on their checking accounts,

CFPB Director Richard Cordray said when the report was released. He went on to explain that there remain concerns that these overdraft programs actually increase the costs for a consumer “beyond reasonable expectations.”

Overdraft or Bounced Check?

The FDIC has its own recommendations along with what CFPB brings to the table. It explains that there actually different definitions that apply to troubled banking consumers. If your bank chooses to extend a courtesy and pay, even though you don’t have the money in your account, you will most likely be charged with an “overdraft” fee. On the other hand, if your financial institution returns the check back to the recipient, the bank assesses a “bounced-check,” or “nonsufficient funds,” fee.

It also recommends consumers should be diligent in their efforts of staying in the green. They need to be able to understand the intricacies of their bank’s policies and how it can cause a “snowball effect”.

It also recommends that all checks and especially ATM withdrawals be recorded in a register. A surprisingly high number of consumers say they get tripped up when they forget to record the $100 they pulled from the ATM on their way to work or school, only to be reminded of it when they bounce a check. Others use auto bill pay services and that can sometimes slip their minds.

Because bank hacking and identity theft are on the rise, it’s important that a consumer treat his monthly banking statements the same way he reviews his credit card statements. Often, this is how many learn their identity’s been stolen. It’s also important that you reconcile that monthly statement to the balance you believe accurate. Remember to factor in any outstanding transactions or checks that may not have hit your bank.

Other recommendations include establishing an overdraft line of credit with your bank. Keep in mind this will be treated much the same as your credit card approval process. It works by allowing your bank to extend the funds needed to prevent bounced checks. The downside is you’ll pay an interest rate and sometimes even an annual fee. In fact, you might even conduct a bit of due diligence to see if your credit card is the better option.

And speaking of credit cards, FDIC reminds consumers that they may be able to link their account to a credit card they have with the bank. If you do choose to your account to a credit card, any overdraft amount becomes a cash advance on your credit card. Prepare for several fees, including a cash advance fee along with the interest you’ll be charged.

What do you think about the new CFPB report? Share your thoughts with us.

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