Banking Blog

Finance Blogs » Banking » Overdraft costs overwhelm bank customers

Overdraft costs overwhelm bank customers

By David McMillin · Bankrate.com
Friday, June 27, 2014
Posted: 9 am ET

© JohnKwan/Shutterstock.comHave you been hit with a fee for triggering the overdraft protection on your checking account, even though you don't think you ever signed up for the program? You're not alone. A new study from the Pew Charitable Trusts shows that overdraft charges continue to cause confusion among account holders. In fact, 52 percent of bank customers who have incurred an overdraft protection fee did not know that they had opted in for the costly coverage.

"Account holders are still befuddled by the rule about opting in for overdraft protection," says Susan Weinstock, director of Pew's Consumer Banking Project.

Interest rates of 5,000 percent

Overdraft protection essentially operates like a short-term loan. If you don't have enough money in your checking account to cover the cost of a purchase, your bank will go ahead and approve the charge. The price of that approval? An insanely high interest rate on the advance the bank gives you to cover the charge. Weinstock says Pew calculated the cost of overdraft fees a few years ago, and, on average, banks charged what amounted to an APR of 5,000 percent.

Plenty of banks have a system in place that can make those costs add up more quickly. It's called high-to-low transaction reordering. A bank might shuffle your purchases to maximize its earnings from your overdrawn account. Weinstock and Pew are urging the Consumer Financial Protection Bureau to require banks to stop the practice, but 25 of the 50 largest banking institutions in the country currently use some type of high-to-low reordering process.

Slow notification

Banks aren't rushing to alert customers when their accounts are overdrawn, either. The study reveals that the most common ways that consumers discover their accounts are overdrawn are when they review their account statement or receive a letter in the mail. Faster methods such as email, text messages and phone calls rank much further behind.

While banks' official overdraft fees typically cost approximately $35, the research shows consumers are paying an average of $69 per overdraft due to reordering and the potential for additional fees. If you've seen these charges on your account statement, it's time to figure out how to protect yourself from overdraft protection. Check out "6 ways to avoid pesky overdraft fees."

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
1 Comment
kathy
June 27, 2014 at 2:51 pm

I see creative math and shifting of checks in my account almost daily, seems where they used to help you avoid an overdraft, now they do everything they can to give you one.
I hate banks and their charge cards even more now. They offer you a card, you think Oh a good idea to finance that tractor I want. Too bad it is close to your limit because now it is a bad thing and it affects your credit rating. The rating system is also a tar pit. And they wonder why we don't trust them!!

Add a comment

(Comments may take 5-10 minutes to appear)