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Overdraft fees can price people out of banking

In 2019, banks and credit unions collected an estimated $15.5 billion from their customers through overdraft and non-sufficient funds fees. These fees are charged when the financial institution determines that a customer’s checking account does not have the funds to cover an expense. They are often assessed for reasons people do not expect or understand, chip away at needed income including public benefits, and take a heavy toll on families living paycheck to paycheck. And, overdraft fees can ultimately drive people out of banking altogether.

While a number of banks have started to lower these fees—and the total volume of fees has started to go down overall—overdraft practices still penalize customers with limited resources and create financial obstacles for them. CFPB research has found that people who pay more than 10 overdraft fees per year end up paying nearly three-quarters of all overdraft fees, and on average, these frequent overdrafters paid $380 in overdraft fees during the year. Similarly, CFPB interviews with consumers have shown that people were concerned that overdraft fees would make it more difficult to catch up and cover future expenses. In the words of one interview participant , the typical overdraft fee of $35 “is a lot of money for a person that doesn’t have any.”

These fees, in turn, can lead to real financial losses for families and turn setbacks into crises. For a low-wage worker, overdraft fees could take up an entire week of take-home pay, or more, over the course of a year. For many families, banking fees could strip away money better spent elsewhere. Indeed, many frequent overdrafters’ budgets already have little room for unexpected charges to begin with. Ninety percent of frequent overdrafters (defined as consumers who incurred more than 10 combined overdraft and non-sufficient funds fees in a year) typically had, at the median, no more than a few hundred dollars in their accounts at the end of any given day. Dipping below a zero balance can lead to hundreds of dollars in cascading fees, which the bank will collect from the customer’s next deposit. As one interview participant noted, “If you are overdrafting, the risk is that you are going to end up with your whole entire deposit being eaten up by overdraft fees.”

Ultimately, people dealing with frequent overdraft fees face a difficult and expensive uphill climb. Across the CFPB, our offices dedicated to servicemembers, older adults, students and young consumers, and low-income people all regularly hear from stakeholders about how these fees not only make it more difficult for people to get by, but affect their overall perceptions of whether the banking system is fair, transparent, and competitive. Here are some of the key themes we have heard from people who contact us.

Overdraft fees exploit payment timing and processing issues

Some people are saddled with fees when they have several pending transactions and a low balance. Indeed, many overdrafts happen soon before someone receives a paycheck or benefits payment—times when account balances are likely to be low. Bank processing and fee assessment practices can dramatically affect the number of overdraft fees an account holder is charged. Many consumers’ experience goes something like this:

On XX/XX/2021 my checking account was overdrawn about {$8.00} and change, I transferred the amount to cover that and bring my account up to XXXX cents by XXXX which I was told by a representative is the cut off time. On XX/XX/2021 I noticed I was assessed a {$35.00} overdraft fee and that my online banking transactions had been ordered in a different way than the night before, making my account negative {$4.00}. I called [financial institution] twice to resolve the issue and they said that the overdraft fee was valid and that they can not reverse it. Spoke with manager XXXX ID # XXXX who stated that she can not reverse overdraft fee as per computer system not allowing her to.

Uncertainties around when payments will be processed and when deposits will be available are extremely difficult to navigate.

Overdraft fees can be expensive and excessive

In some cases, multiple fees add up very quickly, and also greatly exceed the amounts of the underlying transactions. One customer noted last September that they were charged $400 in overdraft fees in the span of just two months:

Since [July] 2021, [Company] has charged me nearly $400.00 in overdraft fees and despite asking to reverse some, I've been told they cannot offer any “courtesy” refunds at this time. … [This] is my primary banking relationship, where I have my paycheck deposited and pay my bills. However, it is becoming increasingly difficult to maintain as the fees are very high, often more than the cost of the paid item. And they are very frequent, being assessed multiple times per week and even per day. It makes it hard to get by when deposits go straight to covering outrageous fees. I understand the Bank needs to make a profit, but this is ridiculous.

This places overdraft fees among the kinds of junk fees that far exceed what it costs the institution to provide the associated product or service and often do not appear to be subject to competitive market forces.

Overdraft fees can lead to account closures

Especially for people living paycheck to paycheck, good-faith efforts to manage their accounts and keep balances positive often aren’t enough. In some cases, beyond posing an unmanageable financial burden, overdraft fees can eject people out of the banking system altogether. Some people, frustrated by their bad banking experiences, close accounts on their own and drop banks and credit unions entirely. The FDIC estimates there are roughly 3.5 million households in the U.S. where people once had a bank account, but no longer do—and of these, 68 percent report being uninterested in coming back. For some, overdraft fees were clearly a motivator. In the words of one interviewee, “I got tired of my checks being gone before I can spend them.” In turn, living without a checking or savings account can make everyday transactions riskier and more difficult.

For others, an unpaid overdraft may lead to a financial institution closing the customer’s account and reporting to a specialty credit reporting agency (CRA) that provides bank account screening. Having a negative report with one of these account screening CRAs typically makes it harder to open an account at another bank in the future.

All Americans deserve a safe and affordable place to keep and manage their money, without fearing that their funds will be depleted through overdraft and other junk fees. In the coming months, the CFPB will continue to explore the range of our tools to tackle these and other financial practices that penalize customers and erode trust.

If you have encountered problems with overdrafts or other bank fees or practices, you can submit a complaint to the CFPB.

For more information on the CFPB’s effort to address junk fees and to submit a comment through April 11, visit the Federal Register .

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