You know that sinking feeling — you’ve logged on to your bank and realized that you’ve been charged big fees for overdrawing the funds in your checking account.
You may have lost track of how much money you had in there, or you simply didn’t have enough cash and spent it anyway. Here’s the thing: overdraft fees aren’t cheap. For each transaction — even small ones — where you overdrew your account, the bank probably hit you with a fee of up to $35, in some cases even more.
And if you didn’t have the money to begin with, now you have to come up with funds to pay off all those fees, which may accumulate additional daily fees until the amount is paid back. It can feel like you’re stuck in a trap of paying money for the money you didn’t have.
But for many banks, overdraft fees are big money. And not everyone is happy about it.
Bank fees are big business
The largest U.S. banks hauled in over $11 billion in overdraft fees in 2015, according to a study from polling and research organization Pew Charitable Trusts.
What’s more, the majority of consumers who pay overdraft fees earn less than $50,000 annually. And nearly a quarter pay the equivalent of one week’s wages for these fees every year.
So how do overdraft fees happen?
Simply put, overdraft happens when you spend more money than you have in your account. For example, let’s say you have $100 in your checking account, but you’ve either written checks or used your debit card for transactions worth $150. That’s an overdraft. (Banks may also charge an overdraft fee for ATM withdrawals.)
Here’s where it gets tricky. Some banks may also order your transactions from highest to lowest amounts, rather than by when they occurred.
Let’s say you have that same $100 in your account, and you know you’re getting paid on a Friday. On Thursday, you go shopping, and spend a total of $150 figuring at most you’ll get hit with one fee. So you spend $20 on groceries, $30 on movie tickets, and at the end of the day, a $100 on a new shirt, assuming your deposit the following day will cover things.
Many banks still process your largest transactions first. So even though $100 was your last transaction before you got paid the next day, it might be deducted first, and then you’d owe $35 on both the earlier $20 and $30 purchases. That’s two fees instead of one.
Clearer language needed on overdraft fees
Fortunately, help may soon be on the way. The Consumer Financial Protection Bureau (CFPB), a federal agency whose mission it is to protect consumers from potentially unfair practices in the financial services industry, released four versions of new one-page disclosure forms on Friday it hopes banks will soon adopt.
The goal of the new forms is to make it clear to consumers that they’ve signed up for overdraft protection in the first place, and to simplify the terms of how overdraft fees are assessed.
In easy-to-understand language, the forms will attempt to explain what an overdraft is, the total dollar amount for each fee, and how many fees you can be subject to each day. Most important of all, they require a manual opt-in process before the fees can be charged.
That last point is particularly important.
You may not have realized it, but you had to opt in to the service that charges you these fees. And you probably did that by signing a form with fine print you didn’t read. If you hadn’t signed, your bank would simply have declined the overdraft transactions.
While that may have caused its own headaches, you wouldn’t be charged the overdraft fees.
“When every penny counts, people need to understand how overdraft works, and whether they want to take the risk of paying overdraft fees on debit card transactions and ATM withdrawals,” Richard Cordray, the director of the CFPB, said in prepared remarks Friday.
Key takeaways: Bankers typically say that overdraft protection services help consumers by making sure they have the funds to do what they want and need to do. That may be true, but overdraft fees are expensive and can cost you $35 each time you overdraw.
New customer forms promoted by the CFPB may soon clarify what’s involved with bank fees for overdraft. Until they’re adopted, learn what your overdraft fees are, and opt out of them if you can’t afford to pay them. It could help you save a bundle.
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Jeremy Quittner is the financial writer for Stash.