During tough economic times, many of us can get dangerously close to the bottom of our checking accounts several times a year. As checks may not clear in the order we write them, sometimes our balance will even go negative by accident. This is the dreaded overdraft.
Many years ago, banks invented a curious form of protection against overdrafts: you are permitted to overdraft, so that you don't get embarrassed by a bounced check or a decline of your debit card in the shop, but you are charged a fee for this tolerance. The overdraft protection fee punishes you for having gone negative on your balance, while you find some money to get back into positive territory.
Banks are giving you a temporary credit while your balance is negative and they deserve to be compensated for it. But $38 Billion during a single year? That's $126 for every single of the 300 million Americans, including newborns and the millions without a bank account.
- 2011: $38B (estimate)
- 2010: $35.4B (estimate)
- 2009: $37.1B (actual)
- 2008: $35.4B (actual)
- 2007: $34.1B (actual)
- 2006: $31.5B (actual)
- 2005: $29.7B (actual)
In 2010, under congressional and public pressure, banks and credit unions started changing the terms of checking accounts to ask for voluntary opt-in to overdraft protections instead of making it a systematic feature. That year, revenues from overdraft fees fell slightly back to their 2008 level.
In 2011, they are resuming their steady rise.
Not all of us overdraft our accounts. But those who do tend to do it repeatedly. You don't want to be part of the club of "frequent overdrafters"; this dubious distinction is costing hundreds of dollars per year.
Unfortunately, the people hurt the most by these fees are the ones who can least afford them.
The Consumer Finance Protection Bureau, which starts operating this summer, will certainly try to protect you against these overdraft protection fees and other abusive clauses hidden in bank disclosure statements that average 111 pages in length according to a report by the Pew Charitable Trust.
This is quite a long shot though. With steadily increasing revenues in the tens of billions, banks will not be tamed easily.
Something is seriously broken if despite the recent legislative protections people keep signing up for checking accounts, opting in for overdraft protection, and getting zinged for $38 billion in fees.
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