How Finances Work

5 Surprising Truths About Overdraft FeesExperts say overdraft fees are the highest they’ve been since the Great Recession. If you find yourself battling unexpected overdrafts, or if you are using overdrafts as a strategy to “borrow” money, here are some important facts that just may surprise you.

  1. Overdraft Fees Are On the Rise

The Bureau of Consumer Financial Protection estimates today’s average bank overdraft fee at around $34. That’s up a whopping 50% from the average $20 overdraft fee in 2000. What’s more surprising is that credit unions, which used to be praised for their low overdraft fees, have actually nearly doubled in that same amount of time, now up to $29 from just $15 in 2000.

  1. Banks Need Permission to Overdraft

You may not realize it, but your bank or credit union is not allowed to overdraft you without your permission. A law passed in 2010 requires financial institutions to give consumers a notice explaining overdraft policies. You have to opt in to allow your bank to overdraft your account. Yet, half of consumers whose accounts have gone into overdraft don’t even remember signing an opt-in agreement, according to the Pew Charitable Trusts, which has evaluated the overdraft fees and their effects since 2013.

  1. Opting Out Doesn’t Always Work

Even if you opt out of allowing overdrafts to your account, opt-in agreements only apply to one-time transactions. Those recurring payments you have set up for automatic withdrawl? They can still incur overdraft fees even if you’ve opted out.

  1. Unnoticed Overdrafts Add Up

You can even be charged repeated overdraft fees when you continue to make charges to your account, before you’ve even realized or been notified that your account is overdrawn. That can really add up, especially for those with lower incomes. In fact, according to the Bureau of Consumer Financial Protection, about 75% of all overdraft fees are incurred by just 8% of account holders.

  1. Small Transactions Carry Big Fees

Most overdraft transactions are $50 or less, and more than half of consumers pay fees back within three days. The majority of overdraft fees on debit cards are on transactions of $24 or less. When consumers carry overdrafts as a way of borrowing money, it can really add up. Say you are low on cash and decide to overdraft $24 as a sort of “loan” from your bank. If your bank charges you a typical overdraft fee of $34 on that transaction, even if you pay it back just three days later, you would have paid a shocking 17,000% APR on the money borrowed.

  1. ATM and Debit Card Overdrafts Hit Hard

According to the Pew Charitable Trusts, banks that charge overdraft fees on ATM withdrawls and debit card expenses bring in 400% more overdraft revenue than banks that do not. What does that mean for you? For starters, it may mean your bank is financially motivated to charge you overdraft fees where you may least expect them.

Know Your Rights

If you use a bank account and find yourself caught up in the endless loop of overdraft fees, be sure you know your rights. You have a legal right to opt out of overdrafting. Experts say being declined is usually a better strategy than getting hit with fees. And if you are using bank overdrafts as a way of borrowing money, there may be better options available. Payday loans, for example, may provide access to cash between pay checks.1,2



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