Banks Charged Low-Income Americans Billions In Overdraft Fees In 2020
Overdraft fees are a silent but costly aspect of personal finance. The most recent Forbes Advisor Checking Account Fees Survey found the average overdraft fee is $24.38, with credit unions charging the highest fee compared to other banking institutions.
But what’s most striking about overdraft fees is that they are disproportionately shouldered by those who can least afford them. The 2021 FinHealth Spend Report, an annual report that gauges the financial health of American households, found that costs related to everyday financial services are hurting low and moderate-income Americans the most.
Overdraft banking fees, specifically, cost consumers $12.4 billion in 2020. Though it’s a decrease from the authors’ findings of overdraft fees totaling $17 billion in 2018, it’s still steep. Stimulus payments, combined with reduced expenses, may have contributed to the decline.
Overdraft fees are a long-standing political hot potato. And with President Joe Biden casting his eye on banking reform, it’s possible the U.S. could see the practice be more tightly regulated in the near future.
Overdraft Fees Suck Money Out of the Pockets of Those Who Need It the Most
Overdraft fees—and the subsequent fees that can occur as a result of them—are a penalty for consumers who spend more than what’s in their bank account. In many cases, the overspending is accidental.
Instead of simply declining the transaction, banks will charge fees to cover it—and while this can be helpful for individuals who might be in a pinch, they can trigger additional fees and cause financial strain.
The FinHealth report in partnership with Prudential, looks at the overall cost of “everyday financial services,” such as credit, payment transactions, account fees and insurance. The report defines these services as crucial to helping households become more financially resilient and able to pursue opportunities.
Households that are struggling to stay afloat financially were hit the hardest when it came to paying for these services.
Ninety-five percent of the overdraft fees consumers paid last year—$11.8 billion—were charged to people described by the report’s authors as financially vulnerable and financially coping. These households are defined by their struggle to spend, save, borrow and plan.
Banks offer a service called overdraft protection, which is where the bank will cover an overpayment from your account so your card isn’t declined—but it comes at a cost. The bank will charge a per-transaction fee for covering the cost.
Forty-three percent of vulnerable households with checking accounts reported an average of 9.6 overdrafts in 2020. If a bank charged $24.38 in overdraft fees per transaction, that means vulnerable households paid nearly $234 in overdraft fees that year.
There are also terms for paying the fees and repaying the amount the bank loaned you to cover the transaction; if it’s not paid within a specified time period (which can vary by bank), you can be charged extended overdraft fees. SunTrust, for example, charges $36 as an extended overdraft fee for accounts that have a negative balance for five consecutive business days.
Although the total price of overdraft fees is steep, it could be even steeper if it weren’t for banking regulations put in place in 2010. These regulations require banks to give customers a choice to decline enrollment in an overdraft protection program–and automatically enrolling them is illegal. The bank will decline ATM withdrawals and debit card transactions at point-of-service terminals for customers who try to spend more than what’s available in their account but are not enrolled in the overdraft program, thus avoiding any fees.
Black and Latinx People Carry Most of the Burden
A closer look at overdraft banking fees illustrates the reality of racial inequality in the United States’ financial system.
The FinHealth report finds Black and Latinx Americans disproportionately pay overdraft fees compared to their white counterparts. Black households are 1.9 times more likely than white households to overdraft their banking accounts, and Latinx households are 1.4 times more likely.
Systemic barriers, structural inequality and discriminatory practices against these communities have made it harder for them to achieve financial health, according to the report—and make them more likely to be susceptible to overdraft fees. Getting passed up for promotions, earning less than white counterparts and having overall less wealth can put these households at higher risk for overdrafting.
Black workers with bachelor’s degrees had just $50,108 in median annual earnings, compared to $61,176 for white workers with the same degree. A 2016 study by Pew Charitable Trusts found that most heavy overdrafters (those who incurred over $100 in overdraft and non-sufficient funds fees) earned around the same amount—less than $50,000 per year.
How Overdraft Fees Could Change During the Biden Administration
Consumer advocates and politicians have been pushing for overdraft banking fee reform for years. Now, with Biden casting an eye on consumer financial protections, it may be time for new regulations.
The topic of charging overdraft fees has been a political football for years. Former President Donald Trump’s administration attempted to repeal the 2010 regulations that curbed overdraft fees, arguing that they were hurting small banks that relied on such fees as a significant source of income.
Sen. Cory Booker (D-NJ) has been leading a years-long rally to overhaul overdraft banking rules. In 2018, the senator introduced a bill to ban overdraft fees on debit and ATM withdrawals in many circumstances and limit the amount of overdraft fees that can be charged per month and year. The bill was introduced in the Senate but made no movement forward in the legislative process.
During the coronavirus pandemic, Booker called on banks to temporarily ban “burdensome bank overdraft fees” and referred to his 2018 proposal as a solution.
Sen. Elizabeth Warren (D-Mass.) has also been opposed to overdraft fees. In 2019, she slammed Wells Fargo for charging overdraft fees on accounts customers believed to be closed, which cost them hundreds and sometimes thousands of dollars.
The Biden administration is already revamping the Consumer Financial Protection Bureau (CFPB), a consumer watchdog agency, including nominating a new director. The agency’s power was heavily reduced under the Trump administration. The CFPB enforces requirements for overdraft services, and is responsible for keeping an eye on services that could be breaking the rules or taking advantage of consumers.
Now, with the Senate under Democratic control with Vice President Harris serving as the tie-breaker, and the Biden administration showcasing it’s not afraid to bypass simple majority votes with budget reconciliation to get its agenda passed, it’s possible overdraft reform could make its way into law.
How to Avoid Overdraft Fees
Many overdraft fees come as a very unpleasant surprise and banks generally put the onus on consumers to effectively manage their money and avoid unexpected costs. But there are ways to prevent, and avoid, overdraft fees, including:
- Keep a higher balance in your account. Not everyone will have the opportunity to go this route. But those who have enough cash on hand could keep a cushion in their checking account to avoid overdrafts. If the average overdraft fee is around $25, having at least an extra $100 in your account each month could be a sufficient cushion.
- Monitor your bank debits on your own. Banks can be slow to display updated balances or new charges, depending on how they’re conducted (a check, for example, can take a few days to be debited out of your account, depending on when the recipient deposits it). Keeping your own tally of your cash flow could give you a better idea of how much money you actually have on hand, rather than waiting for your balance to be updated. You can keep a tally via spreadsheet, or use a budgeting app. This is important for people who have bills on autopay; keeping a close eye on debits can help avoid surprise overdrafts.
- Link your checking and savings account as a cushion. The FDIC recommends linking a checking account to a savings account to avoid overdraft fees. Doing so will allow the bank to transfer funds from your savings account (if you have enough in there) to a checking account that doesn’t have sufficient fees to cover a charge. The FDIC says most banks will only charge a small fee, or none at all, to cover the transfer.
Even with due diligence on your end, overdrafts can still happen. If you find yourself facing an overdraft fee, you might be able to dispute the charge. Some banks can be understanding in the case of an overdraft fee, especially for customers who don’t frequently overdraft their accounts.
Calling the customer service line and explaining your situation could result in the overdraft fee being waived, although this is at your bank’s discretion—and while they might be forgiving the first time, they aren’t likely to forgive multiple incidents.