Despite a 2010 law aimed at curbing unexpected overdraft charges, bank income from overdrafts is on the rise again, hitting $32.3 billion in mid-2015. And a new report by the Pew Charitable Trust lays the blame on debit cards consumers use at ATMs and point-of-sale terminals.
Banks that allow their customers to make overdrafts when using their debit cards took in some 400 percent more in fees charged to consumers for having nonsufficient funds than did banks that simply decline debit card transactions in that case. Notably, under the 2010 overdraft legislation, banks cannot charge these fees unless consumers opt in to an overdraft protection program. However, more than half of consumers who experienced an overdraft charge in the past year say they don't recall doing so.
It's an expensive error. The median cost of overdrafts has soared in the past few years from $20 in 2008 to $30 today, according to Moebs Services, an economic research firm that tracks overdrafts. However, big banks charge more -- $35 to $38 per overdraft, according to Pew.
"There is obviously a lot of confusion on the part of consumers," said Joy Hackenbracht, research officer at the Pew Charitable Trust.
And it's not surprising. The average checking account disclosure document spans 40 small-print pages of legalese, which makes it largely useless to the average consumer, noted the Pew Report. Pew is pressing the Consumer Financial Protection Bureau, which regulates bank products, to require banks to create a simple uniform disclosure document, much like credit card companies must do today.
In the meantime, however, here are four simple steps you can take to protect yourself and eliminate the possibility of ever getting hit by an overdraft charge again:
Opt out: If you're not 100 percent certain whether you have overdraft protection, call your bank and find out. If you have opted in, but you would rather your bank decline ATM and point-of-sale transactions that you can't afford, change your default and opt out of the coverage.
According to the latest Pew report, 68 percent of people who have experienced an overdraft as the result of a debit card transaction would have preferred simply to be told they didn't have enough money.
Link accounts: If you're worried that an occasional emergency might require exceeding your checking account balance, consider linking your checking account to another account, such as a savings or credit card at the same bank. By linking your accounts, you can authorize your bank to pull money from, say, the credit card if your checking account would otherwise be overdrawn by a transaction.
Although transfers from a linked account aren't free, at an average of $10 per transfer, that's one-third the cost of the average overdraft penalty.
Consolidate: If you have an emergency fund or savings account that's separate from your checking account, consider consolidating the two accounts. While it used to make sense to keep a separate savings account where you could earn more interest, the difference in interest rates on checking and savings accounts today is negligible. And by consolidating the two accounts, you're likely to meet minimum balance requirements that will cause the bank to waive all of your monthly checking service fees, in addition to making it highly unlikely that you'd bounce a check.
The one caveat: Remind yourself that the excess money in your checking account should remain saved. Don't spend it just because it's handy.
Verify: You may think you have plenty of money in your checking account, but before you swipe your debit card at an ATM or at a point-of-sale terminal, check your bank balance and make sure to look for any "pending" transactions. The extra five seconds it takes to verify that you have sufficient funds could save you $35 in overdraft fees, which is a great return on the time invested.