Overdraft Protection Can Be Costly According to CFPB

In an article published Tuesday, The Wall Street Journal quoted Consumer Financial Protection Bureau director, Richard Cordray who said, in a conference call, “Overdraft services began as occasional courtesies offered by banks, but now represent more than 60 percent of fees from consumer checking accounts.”

Simply put, a service designed to give customers flexibility has become a revenue generator – an important one for banks and one they are not likely to give up readily, easily, or soon.

Furthermore, the CFPB report indicated that customers who sign up for overdraft protection services not only pay significantly higher annual fees, they suffer more involuntary account closures than people who do not sign up.

The Choices

Bank customers typically have three choices regarding how insufficient funds from a debit card transaction or ATM withdrawal are treated.

They can:

  1. Pay an overdraft penalty fee and receive an advance to cover the shortfall.
  2. Pay a fee to have funds transferred from a linked account.
  3. Allow the transaction to be denied, in which case there is no extra charge.

The Consequences

Those who opt into an overdraft protection program, according to a report by the Pew Research Center, paid an annual average of $225 in fees. The actual fees varied with some as high as $298 ranging down to a low of $147. Those without overdraft protection paid less than half that amount.

In addition, more than 2.5 times as many customers with debit and ATM overdraft protection had their accounts involuntarily closed as those without the overdraft coverage. Involuntary account closure can have a negative effect on your credit record.

Complications

Nothing is ever simple with banks. The numbers of ways overdrafts are handled are many and varied. For this reason alone, according to USA Today, comparison-shopping is difficult at best.

  • Some banks limit the number of overdrafts and non-sufficient funds charges you can incur in a single day. Others allow several or have no cap at all.
  • Some banks charge fees for every overdraft transaction, large or small, no matter how old it is. Others charge only for a negative balance of a certain size or one that has lasted for a certain period.
  • Some banks process large overdraft transactions before any other type of transaction – others do not.

Do You Need Overdraft Protection?

One easy solution to avoiding overdraft charges on ATM and debit card transactions is not to opt-in to overdraft protection. You may have transactions disallowed, but you will not pay an overdraft fee.

If you rarely have a negative balance and can tolerate having a transaction denied when you do, simply not signing up for overdraft protection is probably your best bet.

If you are unsure, here are some pros and cons to consider:

Pros:

  • Overdraft protection eliminates the embarrassment factor – for a fee.
  • Embarrassment aside, overdraft protection ensures you will have funds in an emergency.
  • If you find, at certain times that you need a little buffer between paychecks, overdraft protection is probably more convenient than a payday loan.

Cons:

  • It doesn’t take long to rack up a large balance in fees, and that can turn a bad problem worse in a hurry.
  • Although overdraft protection is convenient, payday lenders actually charge less, according to a study by economic research firm, Moebs Services, quoted by Bankrate.com.
  • Overdraft protection takes the decision away from you. Without it, you know, on the spot, that you don’t have funds available and can decide not to make the purchase and incur additional debt.

Alternatives

Obviously, the best alternative is to make sure you never get close to the balance in your account.

Absent that, instead of opening yourself up to outrageous charges, consider linking your debit card account to a credit card, savings account, or line of credit, said Bankrate.com.

You will still probably pay a transaction fee, but it will be less than that charged for what is effectively a high interest, short-term loan.

Posted In: NewsWall Street JournalRumorsTopicsEventsEconomicsMediaGeneralConsumer Financial Protection Bureaurichard cordray
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