Annoyed By Ridiculous Overdraft Fees?

Have you ever been charged a $39 fee for overdrawing $3 on your debit card for a cup of coffee? Ridiculous, right? Congress thinks so too, and is aiming to do something about it.

Overdraft fees hit consumers hard last year as lenders raked in $24 billion, a 35% increase from two years ago reports the St. Louis Business Journal, which makes overdraft charges the banking industry’s single largest driver of consumer fee income. Now, Congress is siding with consumer complaints that banks and credit unions’ are taking advantage of customers with outrageous overdraft fees and less-than-full disclosure about their overdraft protection programs, and is proposing industry-wide limitations on overdraft practices.

Complaints Turn Into Changes

Debit cards—once the safe alternative to credit cards—is becoming a debt trap for consumers. Right now, banks and credit unions often automatically enroll customers in their most expensive overdraft protection program—up to $39 every time you overdraw your account. Like the above example of incurring a $39 charge for overdrawing $3, overdraft fees can often be disproportionate to the actual overdraft purchase so you are penalized an outrageous fee for a tiny infraction. Banks have also been accused of squeezing as much money out of customers as possible by rearranging the way transactions clear so you get charged overdraft on bigger ticket items, or as many as 9 times in a single day.

To reform other consumer complaints against these practices, some of Congress’ proposed changes include:

• Issuers must get customer’s permission to enroll them in an overdraft protection program, and the option to opt out of it
• Must notify customers that they are overdrawing on their account, and must warn them before any overdraft fee is imposed so they have the opportunity to cancel a charge
• Capping the number of overdraft fees consumers can be charged to once a month and six a year, after which purchases would just be denied
• Require issuers to have “reasonable and proportional” overdraft policies in which charges are proportional to the cost of processing the overdraft
• Prohibit issuers from manipulating the order in which transactions clear to create more charges

On the other side of the argument, banks and credit unions claim that it’s a courtesy to customers to provide overdraft protection to save them from embarrassment or inconvenience of a rejected charge or a bounced check. To that, one Congressman in favor of reform retorted, “Don’t do people favors without asking them.” The proposed changes are still being weighed in Congress as to how much more regulation—on top of the changes some issuers have taken upon themselves already—can be tolerably placed upon big banks. Banks and credit unions are strongly opposing the legislation, arguing that it would lead to higher fees for all customers, such as returned check charges.

Next Steps

Some banks have already reformed their overdraft policies in response to public heat. Bank of America will no longer charge fees if customers overdraw less than $10, Chase and Wells Fargo have cancelled fees for accounts overdrawn by less than $5, and Chase also promises not to charge more than 3 overdraft fees a day (down from a previous limit of 6). But you can protect yourself too. Consumers can take it upon themselves to be more responsible about not overspending, keeping track of expenses, and being aware of your own bank’s overdraft policies. If you want more information, check out How to Avoid Being Charged Overdraft Fees for extra tips.

At Credit Karma Blog, what goes around comes around… So what do you think about this post? Agree, disagree, or have something more to say? We’d love to hear your reactions!