Overdraft Fees Still Maddeningly Mysterious to Many Americans

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A new study indicates that despite federal reforms, consumers are still angry and confused about banks' overdraft practices.

Imagine getting hit with $90 in overdraft fees for a $3 taco you purchased with your debit card. The only thing that might make that situation worse is not being able to recall if you signed up for overdraft protection on your debit card in the first place.

According to a new report from Pew Charitable Trusts, many Americans are still confused about banking rules regarding overdrafts, despite a requirement that customers need to opt in for debit card overdraft protection.

In fact, more than half (52 percent) of people who paid a debit card overdraft penalty fee in 2013, said they did not remember signing up for the service. And it gets expensive. The report said:

In 2013, overdrafters report paying total fees averaging $69 during their most recent overdraft. Although the median total reported was $35, a quarter of overdrafters paid $90 or more during their last overdraft.

Since 2010, federal regulations have dictated that banks get consent from customers before they can process overdrafts and charge overdraft fees. If you don’t sign up, your card will simply be declined if you don’t have enough money in your account to cover the purchase.

Before that, consumers were automatically enrolled in so-called overdraft protection. But people are still confused. Pew said the results of the survey are troublesome.

“Checking accounts are the most widely used financial product in the country, yet many consumers are still concerned and puzzled by bank overdraft practices,” said Susan Weinstock, who directs Pew’s Consumer Banking Project. “Overdraft protections shouldn’t be a guessing game.”

When it comes to overdrafts, the study found that younger, nonwhite and lower-income consumers, as well as people who don’t have a credit card, are more likely to rack up overdraft penalties.

Customers also appear to be fighting back against their bank’s overdraft fees, the study indicated. According to MarketWatch:

Although there was some overlap among consumers, approximately 13 percent of people who paid an overdraft penalty within the last year say they no longer have a checking account, 19 percent reacted to their overdraft fees by discontinuing overdraft coverage, which consumers must opt into by law, while 28 percent actually closed their checking account in response to overdraft fees.

Overdraft fees equal big bucks for banks. According to The New York Times, banks accumulated $16.7 billion in overdraft penalties in 2011 – about $6 billion of which could be attributed to debit card overdrafts.

Pew is urging the Consumer Financial Protection Bureau to require banks to do the following:

  • Provide consumers with clear and uniform pricing information for overdraft options.
  • Make overdraft fees reasonable and more in line with the bank’s costs to cover the overdraft.
  • Prohibit the reordering of transactions to maximize the overdraft fees. For instance, if you have a $50 transaction and a $5 transaction and $49 in your account, the bank could clear the $5 transaction first, so you’d only have one overdraft, instead of two.

Do you understand your bank’s overdraft policies? Share your comments below or on our Facebook page.

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