Overdraft fees are big business for banks. They’re costing consumers quite a bit — many billions of dollars, in fact. Fortunately, there are some things you can do to reduce what you pay in overdraft fees.
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Accordingto a report from the U.S. Public Interest Research Group, in the first three quarters of 2016, 626 large banks collected more than $8 billion in overdraft fees and "non-sufficient funds" fees. It noted: "In 2015, according to an estimate by the Center for Responsible Lending, Americans paid $17 billion in overdraft and non-sufficient funds (NSF) fees (NSF fees are included with overdraft fees in bank reporting). That is the equivalent of $53 for every American, or $166 per U.S. household with a bank account."
Image source: Getty Images.
What are overdraft fees, and why are they so costly?
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Overdraft fees occur if you write a check — or perhaps when you make an ATM withdrawal or debit card transaction — for an amount that exceeds what’s in your bank account. For example, if your balance is $650 and you write a check for $880 to pay a credit card bill, your bank can refuse to process it. If you’ve agreed to an overdraft "protection" plan, your bank will probably go ahead and process the transaction, and also charge you an overdraft fee.
Banks welcome any kind of revenue, of course, but fee revenue has been especially welcome in recent years due to low prevailing interest rates. New regulations have also reined in some fee charging that banks used to do, so some have responded by raising fees, or adding fees.
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Big overdraft fee offenders
So… which banks are raking in the most money in overdraft fees? Here are the top three, ranked by how much they took in over the first three quarters of 2016:
Bank
Total Overdraft/NSF Revenue
Overdraft/NSF Revenue per Account
Chase Bank
$1.4 billion
$28.46
Wells Fargo
$1.3 billion
$15.91
Bank of America
$1.2 billion
$17.90
Source: USPIRG.org.
That’s impressive, but in some ways, these banks are not the top offenders. The bank that ranked 10th on the list, Woodforest Bank, collected only $125 million, but as it’s a much smaller bank, that came out to a whopping $108.16 per account!
Image source: Getty Images.
What the fees could cost you
How much could you face in these overdraft and NSF fees? Well, the folks at NerdWallet reported on a host of banks’ fees and practices last year. Below are some of the big names, and what you might pay in a single day at each of them — as each has its own limits regarding how many times per day it might charge the fee, and many will charge you multiple times in a day.
Bank
Overdraft Fee (per item)
Maximum Fees per Day
Total Possible Cost in a Day
Bank of America
$35
4
$140
Chase Bank
$34
3
$102
Citibank
$34
4
$136
Wells Fargo
$35
4
$140
Source: NerdWallet.
And here are the banks where you could be hurt the most:
Bank
Overdraft Fee (per Item)
Maximum Fees per Day
Total Possible Cost in a Day
BB&T
$36
6
$216
BBVA Compass
$38 ($32 in California)
6
$228 ($192)
Citizens Bank
$35
7
$245
Fifth Third Bank
$37 ($25 the 1st time)
10
$358
Regions Bank
$36
6
$216
Santander Bank
$35
6
$210
SunTrust
$36
6
$216
Source: NerdWallet.
Image source: Getty Images.
What to do
Clearly, if you do much of your banking at a bank that’s ready to charge you a lot, your wallet is in danger. There are several things you can do to improve your situation and reduce your risk:
- First, verify just what your bank’s policy is, as its fees and practices regarding overdrafts may have changed in the past few months. If it has become more consumer friendly, there may be no need to take your business elsewhere.
- If your bank is indeed one that’s ready to charge you a lot for overdrafts, you might switch to a bank that charges lower fees and fewer of them per day. Some that would charge you less than $100 per day as of mid-June 2016 were Ally Bank, Bank5 Connect, Nationwide, Navy Federal Credit Union, and USAA. USAA, as an example, charged just $25 for an overdraft, and no more than twice in a day, for a total of $50. Credit unions, in general, will often charge less in fees than regular banks — in part because they’re member-focused and non-profit.
- You might also stay at your bank, once you explore your options there. Spend a little time with a customer service representative to learn more. Key Bank, for example, has a page on its website explainingyour options (many or most of which are probably available at your bank, too):You can do nothing, and the bank might decline to process a transaction if there are insufficient funds. You can opt in to its Overdraft Services plan, authorizing the bank to cover overdrafts and charge you accordingly. You can link a savings account to your checking account; if the checking account is overextended, it can pull money from the other account. You can sign up for a "Preferred Credit Line" that offers overdraft protection. (It also costs you an annual fee and interest will be charged immediately once you draw on the line of credit.) You can have an overdraft covered by a linked credit card or a home equity line of credit — which, again, will result in interest charges. The bank also encourages you to let it keep you informed of your account status via text messages and its app.
- The best way to avoid overdraft fees, though, is relatively simple: Never try to draw more funds than you have in your account. Keep track of your bank balance regularly, and consider keeping a cushion of extra cash in it at all times.
Most banks are for-profit enterprises, so it’s not surprising that they will be looking for ways to boost their bottom lines. You may be able to save a lot of money and headaches by finding out exactly what you’ve been paying in fees, or what you might be charged, and by either switching banks or changing your behaviors a bit. Why hand over money to your bank needlessly?
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Selena Maranjian has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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