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CFPB Finds Small Debit Purchases Lead to Expensive Overdraft Charges
Friday, August 1, 2014 6:30 AM

The Consumer Financial Protection Bureau (CFPB) released a report yesterday that raises concerns about the impact of opting in to overdraft services for debit card and ATM transactions. The study found that the majority of debit card overdraft fees are incurred on transactions of $24 or less and that the majority of overdrafts are repaid within three days. Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent annual percentage rate (APR).

“This report shows that consumers who opt in to overdraft coverage put themselves at serious risk when they use their debit card,” said CFPB Director Richard Cordray. “Despite recent regulatory and industry changes, overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error. Overdraft fees should not be ‘gotchas’ when people use their debit cards.”

Specifically, the report found:

  • Consumers use debit cards nearly three times more than writing checks or paying bills online, and consumers who are opted in for overdraft services use their debit cards even more frequently, at 24 times per month. The wide use of debit cards can mean more fees for those who opt in for overdraft.
  • Most consumers who overdraw on their accounts bring their accounts to a positive balance quickly. More than half become positive within three days; and more than 75 percent become positive within a week.
  • Consumers pay high costs for overdraft “advances.” Overdraft fees can be an expensive way to manage a checking account. The median overdraft fee at the banks studied was $34. If a consumer were to borrow $24 for three days and pay a $34 finance charge, such a loan would carry a 17,000 percent APR.
  • Eighteen percent of opted-in accounts overdraft more than 10 times per year, compared to 6 percent for non-opted-in accounts. In addition, opted-in accounts are nearly twice as likely to have at least one overdraft transaction per year. Not all of these overdrafts incur overdraft fees, but many do.
  • Opted-in consumers pay seven times more in overdraft and NSF fees per year. Consumers who opt-in for overdraft fee services are paying significantly more for their checking accounts than non-opted-in consumers – about seven times more in overdraft and NSF fees. On average, opted-in accounts pay almost $260 per year in overdraft and NSF fees compared to just over $35 for non-opted-in accounts.

The “Overdraft Data Point” report is available on the CFPB’s website.