Imagine paying $49 for a $15 purchase. That’s what is happening every day with alarming frequency to thousands of checking account and debit card holders across the country who incur an average $34 overdraft fee for small-ticket items. In fact, according to a recently published research brief by the Center for Responsible Lending (CRL), “consumers are paying $17.5 billion in overdraft fees for $15.8 billion extended to them in credit every year.”
“Overdrafts are increasingly triggered by small dollar debit card transactions,” says the CRL. Of the 1,741 consumers surveyed, nearly nine out of 10 checking account customers would rather have their debit card purchases declined at checkout rather than incur an overdraft fee. Rather than declining the charges, the financial institutions allow the transactions to be processed and then hit the customer with overdraft fees.
Almost a third of the consumers surveyed are enrolled in a fee-based overdraft loan program where they are charged an average $34 fee for overdrafts. Those consumers also are more likely to earn less than $50,000 a year. In essence, “their debit card functions as an extremely high-cost credit card,” says the survey.
The core group of consumers who are being slammed with these fees are repeat offenders who do not have a line of credit linked to their accounts nor a link to a credit card or savings account, which serve as considerably less expensive overdraft protection alternatives. “These consumers with multiple overdrafts were more likely to be lower-income, non-white, single, and renters when compared to the general population… and pay 71 percent of overdraft fees,” says the CRL survey.
These consumers want their checking and debit account issuers to offer them a choice of whether to accept or decline an automatic, fee-based overdraft loan program as many of these consumers are automatically enrolled in these programs when they sign up for a checking account. The survey reports that the financial institutions issuing these accounts often don’t volunteer lower-cost overdraft alternatives.
The CRL is conducting a series of surveys on overdraft protection to help shape policy and regulatory changes as fee-based overdraft loan programs captured the attention of Congress last year, resulting in a hearing and a House bill demanding reform on the most abusive practices.