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Why overdraft protection might not provide any net at all

Marketed as a way to keep you from bouncing checking-account transactions, this kind of program could end up costing you

Published: June 2013

Overdraft protection, which kicks in if your debit or ATM transactions cause you to spend or withdraw more money from your checking accounts than is available, sounds like a nice perk from your bank or credit union. But according to a report by the Consumer Financial Protection Bureau (PDF), consumers who opt-in to these fee-based programs could actually end up with more costs and involuntary account closures.

In 2011, consumers who opted-in to the programs spent, on average, $168 more per year in fees than other customers. And while consumers are paying a high price for this service, banks are cashing in. The same CFPB report found that banks make about 60 percent of their fee revenues from checking accounts through overdraft charges, even though less than a quarter of all customers have opted in.

Beginning in August 2010, banks have been required to get your permission before enrolling you in overdraft protection covering ATM and debit-card transactions. If you do not opt in, ATM and debit-card transactions are simply declined if there is insufficient money in the account to cover the charge. However, if you opt in, the bank allows the transaction to go through and charges you a fee.  The median overdraft fee in 2012 at the country’s largest depository institutions was $34, according to the CFPB.

You don’t have to wait for Congress to start protecting yourself from overdraft fees. Use these tips to avoid overdraft fees.

Consumers Union, the policy and advocacy arm of Consumer Reports, believes that you shouldn’t pay a higher price for opting in to a program that’s billed as a way to protect you. That’s why we, as well as other consumer groups, have called on the CFPB and other regulators to strengthen rules when it comes to overdraft programs, including steps to:

  • Require banks to provide customers with simple, easy to understand disclosures of overdraft policies and practices. Banks should give consumers information on the comparative costs for other alternatives for covering overdrafts, such as a line of credit or transfer from a credit card.
  • Set overdraft fees that are reasonable and proportional to the financial institution’s costs.
  • Limit the number of overdraft fees that can be charged each day and each year.
  • Have banks assess the customer's ability to repay after several overdrafts.
  • Prohibit banks from processing transactions in an order that maximizes overdraft fees.

We’ve also put our support behind a bill introduced in Congress to combat outrageous overdraft fees. The Overdraft Protection Act would limit the fees that banks can charge on overdrawn ATM and debit-card purchases and address many of the issues we’ve been fighting to fix.

We need your help to get it moving. If you’ve been hit with an overdraft fee, we want to hear from you. Visit DefendYourDollars.org and share your story so that lawmakers know how important this issue is to consumers.

Consumers Union fights to keep the CFPB strong

Under the watch of its director, Richard Cordray, the CFPB has not only returned $425 million in refunds to about 6 million consumers who were subject to deceptive financial practices but also helped to resolve more than 133,000 financial-services complaints.


Unfortunately a group of Congressional lawmakers has stalled Cordray's confirmation as director until changes are made to the CFPB that would weaken its ability to protect consumers. (Cordray was recess-appointed by President Obama in 2012.)


On June 26, Consumers Union's president, Jim Guest, was joined by Sen. Elizabeth Warren (D-Mass.), one of the main architects of the CFPB, for a telephone town hall with consumers from across the country to discuss what’s happening with Cordray's confirmation process and answer questions about the CFPB’s ability to help consumers.


If you missed the telephone town hall and want to hear what Senator Warren had to say and learn more about what you can do to help get Cordray confirmed, check back here next week.


This feature is part of a regular series by Consumers Union, the public-policy and advocacy division of Consumer Reports. The nonprofit organization advocates for product safety, financial reform, safer food, health reform, and other consumer issues in Washington, D.C., the states, and in the marketplace.


Read other installments of our Policy & Action feature.



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