Tom: This morning you join us to talk about overdraft charges.
Mellody: I do, because this is a very big issue many people are confronted with every month. A number of banks hit people with charges or fees when they overdraw their accounts, and in many cases account holders find themselves in a very vicious cycle. There are a number of options that I want to talk about this morning so that listeners have an idea of what they are confronted with, the difference between each one, and how to avoid the worst options, even if the best choice is to not overdraw your account to begin with.
Tom: What are the different ways that you can be charged for overdrawing your account?
Mellody: There are four main types of overdraft fees you will see. The first, and easily the least troublesome, is a non-sufficient funds fee. This is when you do not have enough money for a transaction, it is declined, and you are charged a fee. The second type is called is called bounce coverage or courtesy overdraft protection. These plans are often offered automatically to ensure your charge goes through, and many of them include a fee on any overdraw on your account.
The third type is a linked credit card. Here, your bank allows you to link your credit card to your account, and if an overdraft occurs, the amount of your purchase beyond your checking balance will be charged to your credit card. Finally, a number of banks offer overdraft lines of credit, where the customer is offered a line of credit specifically to cover any checking account overdrafts. Almost all of these options will have fees or charges associated with them.
Tom: What makes these kinds of services so troubling?
Mellody: A recent article in the New York Times highlighted two of the biggest problems with these fees; many consumers do not know they are signing up for them, and these plans can result in a very vicious cycle of ever greater fees. On this first point, it is very common that when you go to open a new account, you are offered overdraft protection. What is not common is that the type of protection is always explained. And because of the fact that many of us want to avoid bouncing a check or getting a transaction turned down with a card, we readily accept.
The problem is that there is not a lot of transparency around these fees. Since federal bank reform became law in 2010, banks are prohibited from enrolling a consumer in an overdraft program — and charging the fees that can result — unless the consumer opts in. But studies have found that more that half of consumers who end up paying these charges don’t remember opting in. The second problem is that they often snowball. Whether it is the average $35 bounce coverage, or the more problematic line of credit charge, many people – especially those living on a tight budget – incur these fees and then get trapped, causing people to end up paying hundreds or even thousands of extra dollars because of $5 or $25 dollar overages on their account.