Younger adults are among those hardest hit by bank overdraft fees, a recent report from the Pew Charitable Trusts says.
More than one-third of “heavy” overdraft users — those who pay $100 or more in bank fees in a year for overdrawing their bank accounts — are in their late teens through early 30s, Pew found.
One reason younger consumers may be more affected is that they are more likely to use debit cards, and debits make up the majority of transactions resulting in overdraft fees, said Joy Hackenbracht, a research officer with Pew.
“Frequent overdrafts are a financial burden,” she said.
Many banks let customers overspend their checking accounts when they do not have enough money to cover a purchase, but then charge a fee — typically $35 — known as an overdraft fee.
A small proportion of customers pay the majority of overdraft fees, Pew found, and they pay more than three such fees a year. The typical debit transaction amount that results in an overdraft fee is $24.
These customers essentially use the overdraft option as an expensive form of short-term credit, Pew found.
Even if some consumers knowingly use overdrafts as a form of credit, the practice should come with the protections that go with other types of loans, said Susan K. Weinstock, director of consumer banking at Pew.
For instance, she said, banks should have to disclose the effective annual percentage rate on the overdraft protection, which can be quite high.
The findings come from a Pew-commissioned telephone survey of 304 heavy overdraft users in late 2014. (Social Science Research Solutions screened more than 8,400 people to find the participants.) The margin of sampling error is plus or minus 7 percentage points.
In 2015, 628 large banks that are required to report overdraft and insufficient fund fees said the charges totaled $11.16 billion in revenue, or almost two-thirds of all the reporting banks’ fee revenue from consumer deposit accounts, the Consumer Financial Protection Bureau said.
Younger consumers, including those on college campuses, may be more vulnerable to overdraft fees because many are managing their finances independently for the first time, said Christine Lindstrom, director of the higher education program of the U.S. Public Interest Research Group, an advocacy organization.
College students often open new accounts to receive their financial aid “refunds” — money left over after the institution deducts tuition and other costs — and may be caught off guard when the accounts charge overdraft fees, she said.
The Department of Education last year adopted rules banning the charging of overdraft fees on accounts used for student aid. The rules take effect in July, so they will be in place for the academic year starting in the fall.
The rules, however, do not apply to other campus-affiliated bank accounts that are not directly involved in the distribution of student financial aid.
The Consumer Financial Protection Bureau has been scrutinizing bank overdraft practices. Pew’s report urges the agency to adopt rules to make sure overdraft programs are used for “infrequent and accidental” occurrences.
Pew’s suggestions include a requirement that penalties be in proportion to the amount that caused the overdraft or to the bank’s costs in covering the transaction. Pew also suggested capping the number of overdraft fees to six small fees a year; any fees over the cap should be covered by rules that govern other types of credit.
Here are some questions and answers about overdraft fees:
Q: Am I required to have overdraft protection on my checking account?
A: No. Customers must “opt in” to receive overdraft coverage. If you are getting overdraft fees and do not want to pay them, contact your bank to stop the service. Be aware that any debit transactions that exceed your balance will be declined.
Pew’s previous research found that many people who were charged overdraft fees did not recall choosing coverage.
Q: Is there a way to keep some overdraft protection, yet minimize fees?
A: You can often choose an overdraft “transfer” option, which will move money from a linked savings account into a checking account, when needed, to cover a debit transaction. There may still be a transfer fee, but it is often much less than a typical overdraft fee.
Q: How can I avoid overdraft fees?
A: Consumers should make use of an account’s automatic notification options, which send text or e-mail alerts when the balance falls below a certain level.
The Center for Responsible Lending suggested looking for a bank or credit union that offers accounts without overdraft services.
Ann Carrns writes for the New York Times.