| December 1, 2014

Are Overdraft Fee Policies Outdated?

Some major banks revise overdraft policies ahead of new CFPB regulation.

Impending overdraft fees hurt your budget

Overdraft fees can be the bane of your financial existence when you’re on a tight budget and struggling to stay afloat. You think you have just enough money left in your account, only to find that an automatic payment or a slight miscalculation has dropped your balance below zero.

In most cases, your bank is happy to allow you to drop below zero. They just take that opportunity to charge exorbitant overdraft fees – fees that often end up causing even more problems for your budget. How much you pay is largely dependent on your bank and the type of account you have. So you could pay less than $10 at some banks, but pay over $90 for the same overdraft amount at other banks.

It’s this kind of practice that has led the Consumer Financial Protection Bureau (CFPB) to view “overdraft fees as a form of short-term credit.” As a result, the CFPB may explore new regulations that standardize the unstandardized (and often unfair) world of banking overdraft fees.

Ahead of CFPB involvement however, some banks are taking the initiative to revise their overdraft policies. The idea is to limit the use of overdraft fees to generate revenue for the bank. Banks charged $32 billion last year alone. Adding the additional $7 billion in fees paid to check cashing companies that makes overdrafts a $39 billion business for financial institutions.

For banks that have already started to adopt new overdraft policies, the tradeoff comes in providing enhanced mobile banking services that can generate revenue for banks in place of limited overdraft fees. Banks that have already revised their policies or are set to revise them soon include Regions and Ally.

“It’s great to see banks reviewing their own policies ahead of the CFPB investigation,” says Gary Herman, President of Consolidated Credit, “because the current system certainly often only seems to add to the financial burden of families who are already struggling. When money is tight and every dollar counts, you can’t afford to be paying overdrafts at any level – let alone, the high recurring fees you see at some institutions.”

Consolidated Credit offers these tips to consumers who face consistent issues with overdrafts:

  1. Review your current overdraft policy. You may face both a one-time fee for the first overdraft, as well as recurring daily charges for each day the problem is left uncorrected. These daily fees can stack up quickly.
  2. Shop around for a better bank. If you find your bank charges high overdraft fees, it may be in your best interest to switch.
  3. Set up low balance alerts. Whether you stay with your current bank or decide to move, make sure to set up low balance alerts to your phone or email. You can usually set the limit for low balance, which allow you to give yourself some padding.
  4. Fix your budget. If you’reconsistently overdrafting your account, then there’s something wrong with your budget. If you don’t have a formal budget in place, make one. If you already have one, review it to see what’s causing the cash flow problem.

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