Overdraft fees: Which banks are eliminating them, and why

Bank of America is the latest “Big 4” financial institution to reduce overdraft fees.

James Martin / CNET

Bank of America and Wells Fargo have become the latest financial institutions to renew overdraft fees this week. Beginning in May, Bank of America will reduce the penalties for withdrawing $ 35 to $ 10 in excess of the amount available to customers.

Banks in Charlotte, North Carolina Abolition of “insufficient funds” fees -Occurs when payments are returned-And if funds from one account are used to make up for a shortage in another, the transfer fees associated with overdraft protection will be eliminated.

Wells Fargo said it would eliminate not only overdraft protection fees but also inadequate funding fees by the end of March. Beginning in October, financial institutions with a history of 169 years will give clients a 24-hour grace period before imposing overdraft fees, giving them direct access to deposit payments two days in advance.

Mary Mack, Chief Executive Officer of Wells Fargo Consumer and Small Business Banking Said in a statement This change “increases choice and flexibility to meet customer needs.”

That’s what the two big banks are doing, they’re all reducing overdraft penalties, why, and how to avoid them in the first place.

For more information, 2022 checking account, The best debit card for kids, And what banks are doing to help During a pandemic..

What is the overdraft fee?

The overdraft fee is a monetary penalty charged by the bank if you spend more money than is available in your account.

For example, if you have $ 50 in your checking account and you buy a $ 100 item, your bank may charge an overdraft fee because you are $ 50 short even if you clear the transaction. Also, you will be charged the remaining $ 50 when you make another deposit.

Overdraft fees are a subset of “Underfunded” (NSF) fees. If the bank returns the offered payment (such as a check) without covering the amount, the NSF will usually be charged.

How much is the overdraft fee?

Overdraft fees vary from bank to bank, but we typically look at $ 30 for each overdraft transaction. Federal Deposit Insurance Corporation.. If one overdraft request runs out of another transaction, you may incur multiple fees at once.

And regardless of whether you were $ 1 or $ 100 short, the rates are fixed.

Why is the overdraft fee so big?

Senator Elizabeth Warren, a Democrat in Massachusetts, said at a hearing of the Senate Banking Commission in May 2021 that overdraft fees generated about $ 4 billion from top domestic banks last year.

Almost one in ten Americans overdrafts more than ten times a year. Consumer Finance Bureau..

“They are mostly charged to low-income customers, so they attack people who can’t afford to fall into that situation,” said Varun Krishna, senior vice president and consumer finance director. mint When Intuit consumer group, Told CNET. “A person who has been overdrafted with a $ 5 Starbucks latte cannot afford to pay a $ 30 overdraft fee.”

One overdraft fee can initiate a cascading effect, removing an entire personal account from a bang and missing other payments. “They think they probably need me to pay their salaries in advance, and that opens up a whole new set of financial problems,” Krishna said.

And the penalties continue to rise. The average overdraft fee in 2000 was $ 23.74. Bank rate survey.. In 2021, it cost an average of $ 33.58.

Have other banks abolished overdraft fees?

Ally Bank announced in June that it would completely abolish overdraft fees after temporarily exempting overdraft fees during the COVID-19 pandemic. Meanwhile, in April, PNC rolled out features for online customers to help prevent overdrafts.

December, Capital One Said to exclude 2022 overdraft and inadequate funding fees for retail banking customers. (The company already offers free overdraft protection.)

The National Consumer Law Center called the move “a breakthrough moment that would bring great benefits to the most vulnerable consumers.”

That same month, JPMorgan Chase also abolished return / inadequate funding fees and raised the overdraft “cushion” from $ 5 to $ 50.

The Capital One logo will appear on the phone screen against the backdrop of the American flag.

In December, Capital One announced that it would eliminate all overdrafts and inadequate funding fees for retail banking clients.

Photographs by Rafael Henrique / SOPA Images / Light Rocket via Getty Images

“Overdraft service charges only begin with transactions that deduct $ 50 or more from your account at the end of the business day,” the company said in a release.

Later this year, Chase will launch a 24-hour offer to keep balances up-to-date to avoid fees, allowing customers to use their directly deposited salaries up to two business days earlier.

Jennifer Roberts, CEO of Chase Consumer Banking, said: “.

Discover, chime, Axos When desire All offer checking accounts with no overdraft fees.

Jennifer Bombardier, Director of Public Relations for Personal Banking City, Citibank told CNET that the amount it collects from overdraft fees is “one of the lowest compared to its peers.”

According to Bombardier, Citibank will refuse ATM or POS debit transactions when money is unavailable, minimizing the impact of overdrafts and processing checks from minimum to maximum.

Mr Krishna said he suspected that many banks might be discussing reducing overdraft fees.

“Many customers are moving back and forth between major banks, so they strive to keep up with their offerings,” he said. “But if you want to innovate, you have to think a little further. I think more changes may occur.”

Be sure to check with your bank for any changes to your overdraft fee policy.

Why are these banks eliminating fees?

Banks are usually not known to do things because of their kindness. Krishna states that this trend is likely to be driven by a variety of motives, including good public relations and the desire to avoid government intervention. (In 2021, both the House of Representatives and the Senate proposed a bill to limit overdraft fees.)

The banking industry also has new products and financial institutions that need to compete.

“Overdraft fees should have been improved long ago,” said Chrisna. “The reason they didn’t do that was because they were able to profit from misery. But they have to get out of these predatory practices. You don’t charge these fees. There are new players, but it’s like a drug-difficult for them. ”

If a bank charges an overdraft fee, how can I avoid the overdraft fee?

In addition to transferring money to one of the banks that has eliminated overdraft fees, you can opt out of them at any time. According to CFPBIf you do not agree to the overdraft fee, transactions that exceed the available balance will simply be rejected.

However, this is not an absolute option. Even if you bounce and create a check that is returned by the seller, the bank or credit union can still hit you with inadequate funding fees.

There are other strategies Reduce the possibility of overdraft, Sign up for low balance alerts, etc. According to Krishna, Mint offers an overdraft early warning system that is independent of the banking system.

You can also link your checking account to your savings account so that you can transfer funds from one to the other as needed, or you can link your checking account to a credit line.You may still have to pay fees and interest-but that’s normal Less than overdraft fee, According to CFPB. Overdraft fees: Which banks are eliminating them, and why

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