Debit overdraft fees often exceed cost of purchase

The fees that banks charge debit-card users who overdraw their accounts usually cost more than the items being bought.
AP Wire
Aug 3, 2014


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.




I didnt know you could overdraft on a debit card, you can on checking account, most of the time if there is not enough money to cover your debit, it would get denied


So just make sure you have enough money in your account right??...or am I missing something


I would guess most of the people who overdraft their accounts are simply careless with their record keeping... and of course there are always those few who believe they can debit their account into the red, yet deposit enough funds the following day to cover the overdraft without repercussions. For these people, they are simply ignorant of their banks policies.

However, one other aspect that up until recently also contributed to overdraft charges is that for many years, some banks were not following the UCC (Uniform Commercial Code) to ensure that deposits and withdraws were accounted for in the order of the time of transaction. Thus withdraws were being applied before deposits, even though the deposits were made first (in accordance to bank policy) and the funds were to be available before the withdraws. Not only were banks violating the UCC, they were also violating their own policies based on hopefulness of ignorance from ther patrons.

Years ago, my daughter incurred multiple overdraft charges on one day... at $65 each. Her paycheck had been deposited the previous morning and in accordance to bank policy, the funds were to be available. I called the (local) bank to inquire how this could be while explaining they were violating their own policy. The gentleman I spoke with was very forthright in explaining that overdraft charges account for a fairly large percentage of the bank's earnings. My daughter and I then went to the bank with a copy of the UCC which applied to the issue at hand. We spoke with the bank manager, all overdraft charges were immediately dropped and an apology received. To an extent, it still bothers me of how many other patrons of this and other banks were inundated with... and paid overdraft fees which never should have been applied.


Take a scissors and cut up your debit card into little pieces and throw it in the trash. There is no need for debit is still the best way to go. Maybe someone can explain to me why debit cards are preferred over cash which does not require any record keeping.


I agree cash is best, however I myself do not follow my own advice. I may have a couple hundred dollars cash in my pocket, yet for a $20 purchase I will likely use my debit card. The best I have come up with is this is more of a quirk psychological issue and not so much of conscious choice. The knowing I have cash on my person in some odd way leaves me with a sense of security, as where whipping out the debit card (like pretend money) leaves me (at the moment) feeling like I am getting the item(s) for nothing... even though I realize this is not so. Maybe this applies to others as well? Possibly an interesting study of human behavior?


Your user name dont fit your advice EINSTIEN, debit cards are safer than cash and they have a lot more uses.


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