Debit overdraft fees often exceed cost of purchase

JOSH BOAK, AP Economics Writer
View Comments
FILE - This Nov. 18, 2009 file photo shows credit and bank cards with electronic chips in Gelsenkirchen, Germany. (AP Photo/Martin Meissner, File)

FILE – This Nov. 18, 2009 file photo shows credit and bank cards with electronic chips in Gelsenkirchen, Germany. (AP Photo/Martin Meissner, File)

Money 101 with Bob McCormick
Read More

 

WASHINGTON (AP) — The fees that banks charge debit-card users who overdraw their accounts usually cost more than the items being bought.

That’s the result of a study that the Consumer Financial Protection Bureau released Thursday.

Large banks have generally charged a $34 penalty when people overdraw their debit-card accounts, even though most of the purchases involved were for less than $24. And the penalties are charged even though most accounts return to a positive balance within three days, the study found. Banks profit by collecting more than half their checking account income from these fees.

The study builds on a 2013 report that found that heavy overdrafters, on average, face $900 in additional costs each year.

“Overdraft fees should not be ‘gotchas’ when people use their debit cards,” CFPB director Richard Cordray said in a conference call with reporters.

The CFPB is considering what protections might be necessary but has yet to outline specific policy changes that could shield bank customers from these charges. One area of concern for the CFPB is that some banks process transactions by size instead of the time of their purchase. This means the banks prioritize large expenditures such as rent or auto payments ahead of smaller purchases, possibly draining accounts such that buying a cup of coffee can trigger an overdraft fee.

The study found that 75 percent of all overdraft fees come from just 8 percent of bank customers. Younger Americans who frequently use debt cards are more likely to be charged fees. More than 10 percent of accounts belonging to 18- to 25-year-olds are hit with at least 10 overdraft fees a year. Nearly 36 percent of accounts belonging to 26- to 45-year-olds face at least one fee.

Not surprisingly, the fees weigh mainly on people who use their debit cards more often. Nearly half of bank customers with more than 30 debit transactions each month will pay one or more fees each year.

Richard Hunt, president and CEO of the Consumer Bankers Association, said in a statement that overdraft protection and the resulting fees are optional. Consumers can instead choose to have their transactions denied if they exhaust their accounts.

“We believe overdraft protection is a vital banking service voluntarily chosen by consumers to ensure their financial needs are met,” Hunt said.

 

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

 

View Comments
blog comments powered by Disqus
Follow

Get every new post delivered to your Inbox.

Join 28,167 other followers