The 17,000% APR You Might Be Paying

Would you agree to pay a 17,000% APR for a loan? Of course not, but many consumers are paying stratospheric rates when they opt into overdraft programs offered by their financial institutions, according to a report released Thursday by the Consumer Financial Protection Bureau.

I am one of them.

A few years ago, I used my debit card for a very small purchase — less than $10 if I recall correctly — but didn’t realize there wasn’t enough to cover it. (For fraud protection reasons I keep a very small amount of money in the account that my debit card is tied to. If I need to use it for a purchase or to get cash, I transfer in more from my other account.)

The fee for my $10 mistake was $35. Ouch.

In 2010, regulators instituted rules requiring financial institutions to get a debit cardholder’s permission before charging them a fee if a debit card purchase overdrafts their account. When that change came along, I chose not to opt in, and as a result, if there is not enough money in the account my debit card purchase will be declined.

But many consumers have opted in, and as a result they may be paying steep overdraft fees.

(Note that it is still possible to overdraft your account even if you didn’t opt in. For example, if you wrote a check or set up auto pay for a bill using your checking account and there wasn’t enough money in the account to cover that check or auto draft, then you could still be charged a non-sufficient funds fee by your financial institution.)

The fees for short-term “loans” (which is what they really are) add up. Consumers are using their debit cards more than ever, says the CFPB, “about 17 times a month.” And “more often than not, consumers who incur overdraft fees for using their debit card are doing so for small purchases of $24 or less.”

That’s where that 17,000% rate comes in. “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,” notes the press release from the CFPB. “If a consumer were to get a loan on those terms, that would equate to an annual percentage rate of over 17,000 percent.”

Don’t Get Stuck

What can you do to avoid paying that astronomical rate?

1. Find out what your bank or credit union’s fees are for standard overdraft and for NSF. The former usually describes the fee incurred when the bank or credit union allows a purchase with a debit card to go through even if there is not enough money in the account. The latter typically applies when you write a check or make an online payment directly from the account (not with a debit card) and it bounces.

2. If you have opted into standard overdraft, opt out. Not sure whether you did? Ask. On average, accounts for which consumers have opted into overdraft pay almost $260 per year in overdraft and NSF fees, compared to roughly $35 for non-opted-in accounts, says the CFPB.

3. Consider using a credit card instead of a debit card. If you can pay the bill in full each month, you’ll avoid interest, and if you choose a rewards card you can earn points, miles or cash back with each purchase. (Debit card rewards are pretty much a thing of the past.)

4. Sign up for alerts from your financial institution and get their app. Most offer text and/or email alerts if your balance falls below a certain amount. And with your financial institution’s mobile app you should be able to check your balance on the fly. (Be very cautious about using free WiFi to log into your account, however, as doing so may make your account vulnerable to a hacker.)

Fortunately overdrafts typically don’t affect your credit scores, although unpaid balances may eventually be turned over to collections that can appear on credit reports. You can find out whether an unpaid overdraft has impacted your credit by checking your credit reports and scores. (Here’s how to get your free annual credit reports and you can get a free credit score from Credit.com.)

The 17,000% APR You Might Be Paying

Don’t Get Stuck

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