Mistakes can be costly. Overdraw on your bank account by accident and pay the price. Fees continue to increase. Back in 2007, overdraft fees were around $25, but by 2013 had reached $30 on average, and $35 is not uncommon.
You may kick yourself every time you commit such an offense, but your banker is trying to hide the smile from his or her face. Non sufficient funds fees bring big bucks -- about $32 billion in revenue a year.
The Consumer Financial Protection Bureau is eyeing financial institutions’ overdraft practices. The consumer watchdog raised concerns in a report last year that found big differences across financial institutions in overdraft coverage on debit card transactions and ATM withdrawals, drawing into question how banks sell overdrafts. It also found that people who opt in for overdraft coverage end up with more costs and more involuntary account closures.
According to the CFPB study, the average person who overdrew his or her account paid $225 in overdraft and insufficient funds charges over the course of a year. Among the banks in the study, people at some banks paid an average of $298, while others only $147. Among the banks in the study, the rate of involuntary account closures varied widely, by nearly nine percentage points.
Similarly, the Center for Responsible Lending’s study, "The State of Lending: High-Cost Overdraft Practices," released last year, found that debit card transactions trigger the most expensive fees, with the median being $35 for a $20 overdraft. Debit card purchases and ATM transactions account for at least 35% of all overdraft fees. The CRL report revealed that banks continue to manipulate the order of consumers’ transactions in order to charge more fees. CRL concluded that recent reforms have fallen short on stopping abusive overdraft practices.
Overdraft fees are onerous indeed. Here’s how to mitigate or avoid them altogether.
Know the lingo
While overdraft and insufficient funds are essentially the same because you incur a charge because you didn’t have enough money in your account, a difference is that, in the case of overdraft, the transaction is paid by the bank, for insufficient funds, it isn’t, explains David Bakke, a financial columnist with www.MoneyCrashers.com.
An overdraft fee could be from NSF or uncollected funds (UCF), where there is money in your account but there is a hold against the money, or it could be a fee charged when the bank moves money from a savings account into your checking account to pay a presented check when there are non-sufficient funds in the checking account to pay the presented checks, says Warren Taylor, president of community banking for Customers Bank.
Despite the cash cow overdraft fees are, all the hoopla and protest about them has not gone unnoticed by banks.
"While folks want a bank that offers advice, they choose banks based on fees. To take the fee conversation off the table, we created Hassle-Free. About half the people signing up for this account are new Key clients," says Drez Jennings, a spokesperson for KeyBank Community Bank.
Taylor’s bank understands the ire too. "Customers hate punitive fees of any kind. We think charging fees that get our customers mad at us just makes no sense," says Taylor, whose bank recently announced that it will launch the first all mobile bank with no fees in the Fall.
Bank of America dropped overdraft fees years ago, Capital One offers a checking account with no overdraft fees, and some other smaller banks and credit unions offer this as well, says Bakke.
Take advantage of services
Sign up for overdraft protection where money is automatically transferred from your savings account and deposited into your checking account to cover the overdraft amount. "The fee is usually $5-10 for this transfer, but it beats paying $32 per bounced item," says Taylor.
If you have mobile banking, ask to receive an alert when you hit a certain low balance. You can get a text or email. This can help prevent an overdraft.
All members of Navy Federal Credit Union are included in the Free Transfer from Savings program, which pays all overdrafts at no charge. "If a member doesn’t have enough funds in the checking account for a transaction, the funds are automatically moved from savings to pay the overdraft, as long as funds are available for savings," explains Michael Christian, AVP, Savings and Checking for Navy Federal Credit Union. For an additional layer of protection, it offers Optional Overdraft Protection, which covers overdrafts from checks, ATM withdrawals, ACH transactions (for automatic bill payments) and debit/check card transactions.
"The fee is $20 for overdrafts, which is one of, if not the lowest in the industry. Members can opt out of this service at any time," says Christian.
It’s on you
There’s no getting around staying on top of your account. Says Bakke, "Keep better track of your checking account balance. When doing this, don’t go by what is your average balance, that might not reflect transactions made in the very recent past (after normal banking hours in particular), or checks you have recently written that haven’t clear yet."
Taylor offers his best advice, "Choose a bank that does not charge punitive fees."