When the Consumer Financial Protection Bureau was created years ago, one of the primary objectives was to make sure that banks could not take advantage of customers. Overdraft fees was high on the list of changes to make for the CFPB, as consumers we’re losing hundreds of millions of dollars each year simply by overcharging their checking or savings accounts.
Overdraft Fee Protection Data
In 2010 the CFPB came to the conclusion that the way they could save consumers these overdraft fees was to mandate an “opt in” clause when a new customer would sign up for a checking or savings account (as well as require this clause on all existing accounts). If a consumer decides to opt in, they will essentially be changing nothing. Banks will be allowed to attach overdraft fees to their accounts should they charge for something and not have the funds to pay for the charge. By opting out, consumers are asking the bank to decline their purchase if funds are not available (and thus cannot be charged an overdraft fee).
One would think that with the sheer number of people now opting out to overdraft charges, banks would not be taking in as much money as before but that’s simply not the case. Some interesting points to note from the CFPB recent study on overdraft charges:
- Total checking account charges are up 53% over the last 10 years (this includes transfers, checks and debit card charges).
- “Whale” overdraft consumers are on the rise; these types of consumers typically receive more than 10 overdraft fees each year.
- Banks are working harder to convince consumers to opt in to the overdraft protection program. Even when I signed up for a new account, I was told “Wouldn’t it be better to be charged the small fee than to not be able to buy groceries or gasoline?”
Thus while the number of consumers losing money to fees has been reduced, the sheer amount of those fees hasn’t really been impacted all that much. Smaller banks are still reporting that more than 25% of their after tax income comes solely from the receipt of overdraft fees. The CFPB is considering taking two additional steps to reduce the number of overdraft fees to consumers:
- Organize debts in chronological order rather than largest to smallest. When a bank posts transactions for a day, they can do so in a number of ways however many banks will order them big to small in the hopes that your large transactions will wipe your balance out (so that when small transactions post, you won’t have the money to cover them)
- Limit the amount of overdraft protection that a bank can provide. Right now, there are no rules in place so a bank can choose just how many transactions and how much money to “lend” it’s customers. If the amount is regulated, this will significantly cut down on the “whale” customers.
How to Avoid Overdraft Fees
While in college, you could have called me one of those “whale” overdraft consumers. There came a time when my debts far exceeded my assets and income and I opened many a checking account in the attempts of finally being able to meet my monthly obligations. I would skirt by only because of overdraft protection and while it was extremely costly (I estimate I lost more than $5,000 over the course of a 3 year period), there were times I thought it was necessary (barely making rent and utility payments).
The best way to avoid overdraft fees is to do exactly the opposite of what I chose to do. Call your bank and make sure you’ve chose to opt out of overdraft protection so that any charge that comes through on your checking or savings account can only be posted if you have available funds. Yes, this may cause a payment or two to be rejected if you’re not on top of your finances but in the long run, that is a much better option than continually using the fee to allow poor spending habits.