Bank Overdraft Fees: Still Outrageous

Last Updated Aug 8, 2011 5:19 PM EDT

A year ago, the Federal Reserve started requiring banks to get customers' explicit permission to overdraw their checking accounts when using debit cards. Now, if you don't opt in to the bank's overdraft program, you can't get the dough -- or the goods if you happen to be using your debit card to buy stuff at, say, Walgreen's or Target. That could be embarrassing, especially if the sales clerk has the bad grace to sneer, but at least you escape the fees. Nevertheless, as I reported earlier, frenzied bank marketing campaigns preying on consumers' dread of humiliation at the cash register induced 75 percent of American checking account holders --about 100 million souls -- to sign up for the costly service.

Overdraft protection remains a huge bonanza for banks, according to an updated survey of the 14 largest institutions conducted by the Consumer Federation of America, an apolitcal nonprofit that advocates for us ordinary peeps. For starters, there's the fee banks charge when you overdraw. That ranges from $32 to $37, ridiculous when you consider that the typical amount of an overdraft is about $20. I am not a banker; so I don't know how much it costs when a customer overdraws an account, but given that such a transaction is electronic, I can't imagine that the bank pays more than a few pennies.

But you are using the bank's money until you replace it. That's worth something, right? Well, I don't know about you, but my bank savings account is now paying .03 percent a year. My MBA son Max calculated that the APR for a $35 fee on that $20 overdraft for maybe two weeks comes to 4,550 percent a year. You could probably get a loan with much, much better terms from your friendly neighborhood loan shark or predatory payday lender.

What's more, some consumers run up several overdrafts in one day, using their debit card to, say, get a haircut, buy groceries, gas up the car and have their shoes repaired. To accommodate them -- and to rake in more dough, some banks have raised the number of overdraft fees they assess each day. For example, BB&T, headquartered in Winston-Salem, N.C., doubled the number of overdraft fees it charges per day to 8. Regions Bank, which operates primarily in the South, Midwest and Texas, raised its daily limit from four to six per day. Just one bank in the survey -- TD -- reduced its per day limit, from six to five.
But there's more -- money to be sopped up by banks, that is. Two-thirds of those polled by Consumer Fed assess another charge if you don't repay the overdraft (which is really a short-term loan) within a few days. Example: JP Morgan Chase adds $15 after each five-day period the overdraft remains unpaid. And, there's no cost to collecting the money. Banks merely vacuum the fees out of your account the minute you make your next deposit.

"Manipulating the order of processing payments from accounts results in more fees for consumers," according to the survey. In its 2010 roundup, Consumer Fed found that almost all banks processed the largest debit first, usually triggering more fees. Although a few banks -- Citi, Fifth Third and Wells Fargo -- changed their processing rules in the last year, most banks did not.

CFA maps out fees charged by major banks, but you can avoid all the nonsense by opting out of your bank's program. Instead, deposit money in a savings account and have it linked to your checking account. If you overdraw, the bank sucks money out of savings to cover your debit. The fee for that transaction is usually $5. And, upon request, many banks will send you a text message or email alert when your balance drops below an amount you specify. If you're aware of what you've got, you're less likely to overdraw.

You may also want to make your feelings known about the high costs to the Comptroller of the Currency, which is accepting comments until August 8 about overdraft protection programs and other account-related loans. If you (like me) are too lazy or busy to write your own missive, here's a handy-dandy letter that covers it all from the Center for Responsible Lending, another consumer group that I swear is on your side.

More on MoneyWatch