Many people don’t understand the fees they’ll be charged for overdrawing their checking accounts, especially the people most likely to pay, according to a new report by the Pew Center on the States.
Almost 20 percent of consumers incurred an overdraft penalty fee last year, the report found. And nearly a third of all consumers didn’t know that such penalties existed.
“It is important to ensure that checking accounts do not lead to financial distress because of hidden, unexpected, and costly fees like overdrafts,” according to the report.
For years, banks charged overdraft fees without asking consumers’ permission. That changed in 2010 when the Federal Reserve implemented new rules requiring banks to tell consumers that they did not need to carry overdraft protection, and requiring banks to get an affirmative “opt-in” from customers before enrolling them in overdraft programs.
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With overdraft protection, banks offer to cover purchases even when the customer’s account is empty, in exchange for a median fee of $35. Another option is the overdraft protection fee, which transfers funds from a savings account or credit card to an overdrawn checking account. This fee averages $10 per overdrawn transaction, according to Pew.
But if consumers never opt in, banks can’t authorize overdraft transactions or charge such fees.
The Pew report suggests that banks may be doing a poor job of informing consumers about their options. Three-quarters of people who overdrafted their accounts in the last year said they would have preferred that their banks declined the transactions altogether.
Among all respondents, 40 percent believe their financial institutions’ overdraft policies are “somewhat or very confusing,” the study found, and 62 percent said that the service hurts consumers more than it helps.
The Pew Center called on financial institutions to do a better job of explaining overdraft penalty fees.
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Image: db Photography, via Flickr
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