CFPB Finds Small Debit Purchases Lead to Expensive Overdraft Charges

CFPB Overdraft Fees

The latest CFPB report came out detailing bank's use of overdraft fees. The quick take is that overdraft fees by banks are still not being used to the CFPB's liking, but it has improved. Here are some bullet points from the CFPB and the report:

 

  • Consumers use debit cards nearly 3x more than checks or paying bills online: The most common way consumers access money in their accounts is through debit card transactions. The study found that consumers use their debit cards for purchases about 17 times a month; in comparison, consumers, on average, write checks fewer than three times per month, and they make automatic bill payments a little more than three times per month. Consumers who are opted in for overdraft services use their debit cards even more frequently, at 24 times per month. The wide use of debit cards can mean more fees for those who opt in for overdraft.

 

  • Majority of debit card overdraft fees incurred on transactions of $24 or less: When consumers use their cards, it is typically for smaller purchases than when they write checks or use a bank teller. Consumers who opt in for overdraft services incur the majority of their debit card overdraft fees on transactions of $24 or less. Most overdraft transactions for which a fee is charged — including debit overdraft transactions — are $50 or less.
  • More than half of consumers pay back negative balances within three days: Most consumers who overdraw on their accounts bring their accounts to a positive balance quickly. More than half become positive within three days; and more than 75 percent become positive within a week.
  • Consumers pay high costs for overdraft “advances:” Overdraft fees can be an expensive way to manage a checking account. The median overdraft fee at the banks studied was $34. If a consumer were to borrow $24 for three days and pay a $34 finance charge, such a loan would carry a 17,000% APR.
  • Nearly one in five opted-in consumers overdrafts more than ten times per year: The study found that 18 percent of opted-in accounts overdraft more than ten times per year, compared to 6 percent for non-opted-in accounts. In addition, opted-in accounts are nearly twice as likely to have at least one overdraft transaction per year. Not all of these overdrafts incur overdraft fees, but many do.
  • Opted-in consumers pay seven times more in overdraft and NSF fees per year: Consumers who opt-in for overdraft fee services are paying significantly more for their checking accounts than non-opted-in consumers – about seven times more in overdraft and NSF fees. On average, opted-in accounts pay almost $260 per year in overdraft and NSF fees compared to just over $35 for non-opted-in accounts.