Is there a worse consumer gnat than an overdraft fee? You miscalculate the timing of a deposit, and before you know it, you’ve been charged $34 for being overdrawn $5.
It’s a mistake you think is worthy of a mulligan, but one the bank seems to relish, especially when more transactions come in before you get the matter settled and the dominoes start to fall everywhere.
Regions Bank had its hands slapped for illegal surprise overdraft fees by the Consumer Finance Protection Bureau (CFPB) a year ago. Other banks probably sat up and took notice, becoming less aggressive than they were pre-pandemic and the haul on fees was greatly reduced.
But the candy jar of overdraft and non-sufficient funds (NSF) revenue is still tempting enough for banks to charge an estimated $7.7 billion for those consumer indiscretions in 2022.
The number of overdraft-related complaints quadrupled at the CFPB earlier this year and a new research study by PYMNTS’ research found that 39% of consumers who live paycheck-to-paycheck and struggle to pay bills suffer transaction declines and overdrafts, compared to 6.3% of those not living paycheck to paycheck.
And where it stops, nobody knows…
The study says that a lot of the pain fell on the shoulders of millennials and the “credit marginalized” — consumers who experienced at least one credit rejection in the past year.
Baby boomers stay out of harm's way, but interestingly enough, nearly 25% of those making $100,000 or more a year found themselves guilty of attempting transactions without sufficient funds. And they, along with Gen X’ers wound up paying overdraft fees at a higher rate than other consumers.
There are ways around this, but you’ll need to get clarifications
Overdraft fees can cut two ways. PYMNTS said the average flat fee consumers faced was $29, but when every dollar counts, that $29 can go a long way.
The other knife wound is that 90% of consumers who experienced overdrafts faced even further hardship, with nearly 66% of overdrafts leading to broader credit accessibility issues like impaired credit scores or the lack of funds to pay other charges if things start to snowball.
How can you avoid the overdraft quicksand? ConsumerAffairs reached out to some financial experts to get their two cents on how consumers can avoid overdraft and NSF issues.
“It can be challenging as a consumer to avoid fees completely,” said Joel Schwartz, founder and co-CEO of DoubleCheck, a fintech helping financial institutions provide consumers’ transparency and control for NSF fees.
“Some financial institutions offer “free checking” which sounds like a fantastic value, right? Turns out that the people who developed the ‘free checking’ concept knew that the consumers who were most interested in free checking would be the ones most likely hit with overdraft and other account fees,” he said.
To that end, avoiding fees might mean you have to jump through your bank’s fee requirements hoops. Those can vary bank-to-bank, but most general requirements include maintaining a minimum balance of a specified amount, setting up direct deposit, etc.
Schwartz says you can pore through the fine print if you want but it may be easier just to call your local branch and ask them what the lowdown is. He also suggests setting up low-balance alerts.
Overdraft Protection can be a good idea depending on the situation, but there may be fees associated with overdraft protection and the perception that it covers everything is misguided. Before signing up for that, you’d be wise to learn what’s covered and what’s not.
So can “automatic Transfers,” says Investment analyst and banking guru Young Pham. “Set up automatic transfers from your savings account to your checking account to cover any potential shortfalls. This proactive approach can prevent overdrafts and related fees.”
'I promise, I’ll never do it again!'
Pham says that some banks offer Overdraft Forgiveness (aka “Overdraft Courtesy”) programs, where they waive the first overdraft fee or provide a grace period to replenish your account without penalties. Be sure to check if your bank provides such options.
But be careful because these things may look like a duck but they may not walk like a duck.
For example, FindABetterBank (FABB) says that when you choose Overdraft Forgiveness – which works for both checks and debit card purchases – your bank will cover the cost of purchases that cause your account to go below zero.
What this will do is help prevent your checks from bouncing, but what it won't do is keep you from paying a fee if you don't have enough money in your account.
“While this feature can be useful in emergencies, it can also lead you to racking up fees for debit card purchases that you wouldn’t make if you knew they’d overdraft your account. Cue the infamous $35 cup of coffee,” FABB warned.