Consumers who sign up for overdraft protection are paying hefty penalties when they go over their limit for the smallest of purchases, according to a new report from the Consumer Financial Protection Bureau.
In fact, most of the purchases that triggered the overdraft protection were $24 or less.
“Some consumers are essentially paying $34—which is the typical overdraft fee—to have the bank spot them less than $24 for just a few days,” said CFPB director Richard Cordray in a statement. “If a consumer were to get a loan on those terms, that would equate to an annual percentage rate of over 17,000 percent.”
The requirement to “opt in” to overdraft services has been in place since 2010. Generally, after opting in to overdraft protection, a debit card transaction will go through regardless of whether the buyer has the money to cover it. Without opting in, a debit card transaction without enough money in checking will be declined.
Among the study’s findings: Almost one out of every five consumers with overdraft protection was penalized for going over their limit ten or more times per year. Those who opt for coverage pay seven times as much money in overdraft and non-sufficient funds fees than those who don't. They are also more vulnerable to having their accounts involuntarily closed. So why opt in at all?
“The pro, from a consumer standpoint, is that [your card] wouldn’t be turned down,” said Chris Long of Long Financial Planning in Wicker Park. “You’re on a date with somebody new and you’re trying to buy dinner, and you wouldn’t be turned down and embarrassed in a situation where your card would be declined.”
Being able to use your debit card no matter how much money is in your account can also be convenient in emergency situations, Long said: “Charges will go through, and you won’t have to worry about being stranded or an emergency or something like that. You know the transaction will go through.” Still, Long doesn’t recommend that consumers opt in to overdraft charges.
“The vast majority of people, I think, you’re better off not doing it,” he said, citing high overdraft fees.
A declined debit card transaction can also act as a wake-up call, Long said.
“You need some kind of feedback mechanism to tell you you’re not right,” he said. “At least that’s better than not knowing. … It might be a signal to say, hey, I need to do a better job of handling my finances.”