Advice to consumers: Say no to high-cost overdraft fees

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(NNPA)—As parents everywhere prepare for their children to return to school, spending for clothing, school supplies and equipment can mount up in a hurry. Amid the harried and hurried rush to get students ready for new school terms, one particular time-sensitive insert to bank statements may not receive a thoughtful review. Anyone who has an active checking account is affected.

Starting Aug. 15 banks and credit unions will no longer be able to charge overdraft fees on debit card transactions unless consumers have chosen to specifically accept this kind of overdraft coverage. In an effort to preserve these revenue-rich fees that generate nearly $24 billion annually on an average charge of $34 per transaction, financial institutions are aggressively using a combination of mailers, telephone calls, Web advertising, ATM screens and more. The marketing message is to “hurry up and enroll.” Wiser minds would advise consumers to “slow down and read the fine print.”

CharleneCrowell

The notion of lending institutions covering temporary account shortfalls for their customers is a deceptive one. Despite all the hype of convenience to customers, the reality is that in choosing overdraft coverage, consumers living paycheck to paycheck find that their actual disposable income has been significantly reduced. Moreover, multiple overdraft fees in a single billing cycle reduce the amount of funds actually available when a new deposit is made.

Further complicating the ability to determine actual account balances is the continued practice of reordering transactions instead of applying them chronologically. Instead of deducting funds in the order received by the bank or credit union, larger transactions are typically applied ahead of smaller and earlier ones.

In short, overdraft fees are a financial boon to banks and credit unions but a budget-buster for consumers who keep slim balances in their accounts. These practices are the most painful for low-income, single and minority heads of household.

Although a study by the Federal Deposit Insurance Corp. (FDIC), found that one-fourth of all bank accounts become overdrawn over a year’s time, only five percent are overdrawn 20 or more times per year. For this segment of consumers, the amount of money lost to overdraft fees exceeds $1,600 a year.

The FDIC’s finding is consistent with earlier research by the Center for Responsible Lending that found only 16 percent of account holders bear 74 percent of all overdrafts. Additionally, CRL’S independent consumer survey determined that most checking account holders would prefer a debit card transaction to be declined rather than incur fees for overdraft.

To be fair, some banks have voluntarily begun to alter their own practices. Bank of America, the nation’s largest debit card issuer, has now joined Citibank, USAA and ING Direct to help their customers by not allowing them to spend more than they have when using their debit card. This single change avoids costly overdraft fees.

As an organization pledged to building family wealth and opposing predatory lending in all of its forms, CRL encourages other lenders to follow the progressive examples of these institutions. However, CRL also offers two key consumer recommendations to help people to keep more of their hard-earned wages: Do not consent or “opt-in” to overdraft coverage on your debit card. Instead, consider lower-cost alternatives such as a line of credit or linking an account with back-up funds; and

•Consider signing up for programs that banks or other lenders offer to help you monitor your own money and account balance; with today’s technology, e-mail and text messages can quickly alert consumers to a low balance.

(Charlene Crowell is the Center for Responsible Lending’s communications manager for state policy and outreach. She can be reached at: Charlene.crowell@responsiblelending.org.)

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