Would you pay $35 to borrow $17?
No?
Well, that’s how much your checking account would be dinged if you didn’t have enough money in it to cover an average purchase. And, most likely, your debit card is what got you into trouble.
In 1997, the average overdraft fee was roughly $16.50, according to the Center for Responsible Lending. Today, the median overdraft fee is $35, according to the Consumer Federation of America, which recently conducted a survey of fees charged by the nation’s 16 largest banks.
“Every time we go back and look at the largest banks’ fees, we find they continue to creep up,” said Jean Ann Fox, the consumer federation’s director of financial services. According to the survey, Citizens Bank has the highest overdraft fee, at $39. Citibank has one of the lowest, $34.
Consumer advocates say overdraft fees essentially are high-interest short-term loans. Most banks charge an initial fee for covering the transaction and many charge an additional fee if the overdraft loan isn’t repaid within a set time.
So let’s say you get a $100 overdraft protection loan for seven days from a bank that charges a $39 initial fee and a $35 sustained overdraft fee, which kicks in if you don’t repay the loan quickly enough. The annual percentage rate on that loan would be close to 4,000 percent.
The consumer federation and other consumer advocates have lobbied federal regulators to curtail overdraft fees, saying they are unfair because consumers are issued such loans without their consent and often without being told about the costs of borrowing the money.
The median purchase for a single debit card overdraft is roughly $17, according to the Center for Responsible Lending. With the frequency with which many consumers use their debit cards, it’s possible to rack up several overdraft charges in a day. Four bucks for coffee here. Seven dollars for lunch there. Little amounts that quickly add up.
Ten of the banks the consumer federation surveyed had no limit on the number of overdraft fees they charge each day. Of those that did set limits, the maximum was 10. So if you made 11 debit card purchases in one day, with the first one triggering an overdraft, you could be charged as much as $390 in fees in addition to having to repay the amount of the overdraft.
Some of you may believe that avoiding overdraft fees is as easy as keeping a close eye on your bank account.
But consumer advocates say that banks don’t always make it easy for you to monitor your own account. For example, some banks process withdrawals before they process deposits, so it’s possible to get an overdraft fee on a transaction that you thought would be covered.
The Center for Responsible Lending’s policy counsel, Rebecca Borne, adds that many banks process withdrawals from largest amount to smallest, increasing the chances you’ll be charged multiple overdraft fees for the smaller purchases that don’t clear.
“For people who don’t have a ton of cushion, it’s difficult to know at any given time if a transaction is going to trigger an overdraft fee,” Borne said. “Consumers are really in a position where they have to play self defense against their banks.”
Tom Kelly, spokesman for JPMorgan Chase, one of the financial institutions surveyed, said the bank offers consumers several options to keep track of account balances, including e-mail alerts that are sent when the account falls below a set amount. He said the terms of overdraft fees and withdrawal processing are spelled out in disclosure information customers receive.
“Consumers should use the tools that are available from the bank that are designed to help you manage your money,” Kelly said. “It makes sense to pay attention, especially now. Be an educated consumer.”
What can you do to help prevent excessive overdraft fees?
First, experts say, contact your bank and opt out of the automatic, fee-based overdraft protection on your account. Ask instead about cheaper forms of overdraft coverage, including lines of credit and linking your checking and savings accounts.
But most importantly, keep a close eye on your cash reserves.
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“Keep a buffer of money in your checking account and keep careful track of every payment that comes out,” Fox said. “You have to assume that there’s no breathing room anymore.”
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