Originally published in the Money Advisor section of the New York Times, here.
Submitted by New Jersey Bankruptcy Attorney, Lee Perlman
It has been nearly four years since rules went into effect to help clarify when banks may charge you penalties if you overdraw your checking account using your debit card. But many people remain confused about so-called overdraft fees, a new report finds.
The report from the Pew Charitable Trusts found that in 2013, 10 percent of adults with checking accounts paid at least one overdraft fee — that is, a fee for a short-term advance from their bank to cover a shortage in their checking account. Another 5 percent paid an overdraft transfer fee, charged for transferring funds from another account or a credit card. People who overdrew reported paying fees averaging $69. The typical overdraft fee was $35, but banks may add extra fees if the shortage isn’t covered quickly.
In 2010, federal rules took effect that required banks to ask customers to affirmatively choose — to opt in — if they wanted overdraft protection on their debit cards. That means that if you use your debit card to make a purchase or withdraw cash from an A.T.M., and overspend your balance, your bank will process the transaction and cover the shortage with a temporary advance, in exchange for a fee. If you don’t opt in, transactions are declined, with no fee.
Yet more than half of those who were charged an overdraft fee when using their debit card say they do not recall agreeing to the service, the Pew report found. That suggests the banks aren’t explaining their overdraft policies clearly and raises questions about how overdraft protection is marketed, the report said.
Susan Weinstock, director of consumer checking for Pew, said in a briefing with reporters that a suggested form for explaining overdraft options, provided by the Federal Reserve for use by banks, may be confusing for consumers. “That form needs some work,” she said. Pew has proposed a simple disclosure box that banks could use to explain overdraft options to their customers. “It would help resolve the confusion that we have seen is so prevalent in the marketplace,” she said.
Still, the report noted that the proportion of people who said they had paid at least one overdraft fee had declined two percentage points, from 12 percent in a survey Pew did in 2012. Ms. Weinstock said it was not clear what caused the decline. The proportion of people paying transfer fees was unchanged, at approximately 5 percent.
Overdraft fees are a big source of fee income for banks, the report notes. Banks collected an estimated $16.7 billion in such penalties in 2011, at least $6 billion of that brought in by debit card use.
Young adults and lower-income and nonwhite Americans are more likely to be charged overdraft fees. Those with a credit card, however, are much less likely to pay the fees, the report found.
The report is based on a December telephone survey of more than 1,800 people by Social Science Research Solutions. The survey included people who had been charged overdraft and transfer fees, as well as people who had transactions declined and those who had never overdrawn. The margin of sampling error is plus or minus 2 percentage points.
Here are some additional questions about bank overdrafts:
■ Are the rules the same for overdrafts caused by checks?
No. Banks are allowed to charge you a fee for paying a check, as well as some recurring electronic payments, that overdraws your account — even if you didn’t opt in to overdraft coverage.
■ How can I avoid overdraft fees?
The Consumer Financial Protection Bureau advises that if you are being charged a lot of fees, you should consider telling your bank that you would like to opt out of overdraft coverage for debit purchases and A.T.M. withdrawals. If you overspend, the transaction will be declined, but you won’t be charged a fee. Another alternative is to ask your bank about linking your checking account to a savings account or credit card. Funds can be transferred from that account to cover a shortage in your checking account. You will still be charged a fee, but it’s typically much lower than an overdraft fee. Pew found the typical transfer fee is $10.
■ What if I didn’t opt-in to overdraft coverage for debit card transactions, but I was charged a penalty anyway?
You can file a complaint with the Consumer Financial Protection Bureau. The agency is reviewing bank overdraft policies, and is expected to issue a report, and possibly propose some new rules, this year.