The nation’s 628 biggest banks made $11.16 billion just from overdraft and non-sufficient funds fees in 2015, the first year they’ve had to share this data publicly.
On average, these two fees amounted to 8% of the banks’ net income and made up almost two-thirds of all service fees charged to consumer bank accounts. The new data were released by the Consumer Financial Protection Bureau.
The problem with overdraft fees
Both overdraft and NSF fees occur if you pay for something with a check, debit card or online transfer without having enough funds in your account. They differ in the end result, though: An overdraft fee gets charged when your bank covers the purchase; an NSF fee occurs when you’re not enrolled in an overdraft program and a transaction gets declined.
Overdraft fees can be worse. Although the median cost is $34, one overdraft can result in multiple fees if you keep using that overdrawn account for days. Plus, most overdraft fees from debit cards occur from transactions of $24 or less, according to a study by the Pew Charitable Trusts. In 2013, a quarter of people hit by overdraft fees paid $90 from one instance, the study showed.
Transparency around these fees is also an issue. 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 in 2014, Pew found that just over half of people paying overdraft fees didn’t remember opting in. The CFPB, created as part of the banking reforms, has issued reports and concerns over the nature of overdraft fees for years.
» MORE: Overdraft fees by bank
New light on overdraft fees
Banks must send public quarterly financial statements to the Federal Financial Institutions Examination Council, but breaking down their revenue by different fees was not required before last year. Until 2015, banks lumped all fees into one revenue category on these reports.
The data released last week is from banks with $1 billion or more in assets, representing one-tenth of all banks regulated by the Federal Deposit Insurance Corp. The overdraft and NSF fees are from consumer bank accounts only. Credit unions, which get regulated by a different agency, are excluded.
How to avoid overdraft fees
- Monitor your account balances. Use text alerts or mobile banking to stay up to date on how much is in your checking account.
- Don’t opt in to an overdraft program. Although some banks charge the same amount for NSF and overdraft fees, there can be a big difference in total cost. You can get charged only one NSF fee per transaction, but you can rack up repeated overdraft fees if your balance goes in the red and is left unpaid for days or weeks.
- Link to a second account. If you want to avoid declined transactions, link your checking account to a savings account. When necessary, your bank will transfer money from that savings account to cover a purchase. There’s a fee but it’s much smaller than an overdraft or NSF fee.
- Consider getting a prepaid debit card. Since these cards don’t link to checking accounts, they require you to add money before you use them. Prepaid debit cards generally don’t incur overdraft fees, but some charge for declined transactions like rejected checks or recurring online payment attempts. If you can find a card without these fees, this can be a good way to avoid overdraft and related costs.
» MORE: Best prepaid debit cards
Banks make a sizable chunk of money from overdraft fees, but none of it has to come from your wallet. Keep up positive money habits to avoid scenarios in which your bank account goes negative.
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