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If you’re one of those people who feel like they pay more than their fair share in bank overdraft fees, you are not alone. A report by the U.S. Consumer Financial Protection Bureau (CFPB) reveals that people who frequently overdraft their checking account represent just 9 percent of all accounts, but they pay nearly 80 percent of all overdraft and non-sufficient fund (NSF) fees.
Considering that banks made over $30 billion in overdraft fees in 2016, that’s no small chunk of change overdrafters lose each year. The report goes on to define overdraft frequency and attempts to paint a portrait of frequent overdrafters, based on data pulled from 240,000 active accountholders. Although the sampling is rather small compared to the 40 million active accounts in the U.S., if it is true, it is a startling statistic.
Tracking Frequent Overdrafters
The report defines an overdraft as any transaction in which a bank attempts to clear an amount that exceeds a customer’s account balance at the end of the day. It excludes any overdraft that is below the bank’s threshold based on its policies or federal regulations. With many banks, if an overdraft results in NSF of less than $10 at the end of the day, no fee is charged.
The report also makes a distinction between debit card transactions of customers who opt-in for debit card overdraft protection and those who don’t. Generally, banks will decline debit card transactions and not charge a fee when there are insufficient funds if the customer did not opt-in.
It gets worse for “very frequent” overdrafters. They account for just 5 percent of all accounts but pay more than 63 percent of all overdraft and NSF fees. The difference between frequent overdraftees and very frequent overdraftees is the number of overdrafts that occur within a 12-month period. Frequent overdrafters experience more than ten overdrafts and NSFs during that period while very frequent overdrafters have more than 20.
Who Are the Frequent Overdrafters?
In creating a financial profile of the people who are frequent overdrafters, the report breaks down the group based on the dollar amount and number of their monthly deposits, their credit scores, and their average end-of-the-day balances. Again, there are no major surprise here; nearly three-quarters of frequent overdrafters have low end-of-the-day balances as well as low or moderate monthly deposits and credit scores. The median credit scores for this group are between 532 and 661.
The smallest group of frequent overdrafters, about 10 percent, had higher end-of-the-day balances, monthly deposits, and moderate credit scores. Another common characteristic is that most frequent overdrafters have limited available credit on their credit cards, which would make them more likely to overdraw on their checking accounts.
Want Fewer Overdrafts? Don’t Opt-In to Debit Card Overdraft Protection
Perhaps the biggest reveal, and one that bank customers who are prone to overdrafts should consider, is the difference in outcomes based on overdraftees who opt in to debit card overdraft protection and those who don’t. Not surprisingly, customers with opt-in debit card overdraft protection are more likely to experience overdrafts or insufficient funds than customers who don’t opt-in.
By having debit card overdraft protection, customers authorize the bank to cover debit card transactions even if there are insufficient funds in the account. That means if a customer makes a purchase and there are insufficient funds in the account, the bank will go ahead and approve the transaction causing an overdraft. Unless the customer covers the overdraft before the end of the day and exceeds the bank’s maximum daily overdraft threshold, the customer will be charged a fee. Conversely, if a customer does not opt-in to the protection, the transaction will simply be denied by the bank, which can be a source of embarrassment, but also less expensive for the customer.
The study found that frequent overdraftees who do opt-in for the protection, experience 25 percent more overdrafts than those who do not. More importantly, frequent overdrafters who opt-in pay 260 percent more in overdraft fees than those who don’t opt-in. Based on a typical overdraft fee of $34, that translates into an additional $442 paid by opted-in frequent overdrafters in a 12-month period. The key takeaway here is, if you are prone to overdrafts, it is probably not a good idea to opt-in to the debit card overdraft protection coverage.
Author: Jeff Gitlen