Small Debit Card Purchases Lead to Big Overdraft Fees

August 5, 2014, Written By John H. Oldshue
Narrow Focus Of Debit Card With Money

A new report from the Consumer Financial Protection Bureau indicates most overdraft fees on debit cards occur on transactions of $24 or less. In addition, the majority of consumers pay back those overdrafts within three days.

This means that a consumer borrowing $24 and paying the average $34 overdraft fee on an account in three days would be paying the equivalent of 17,000% APR on the loan.

An overdraft occurs when a financial institution allows for a transaction to go through even though the consumer doesn’t have enough money in his or her account to cover the transaction. In 2010, banks made overdrafting an option, requiring cardholders to “opt-in” to that program, rather than automatically being enrolled in the program. But banks try very hard to convince consumers to opt-in for this overdraft option.

The CFPB’s study shows that opted-in consumers pay seven times more in overdraft fees per year than other customers.

The report also found that  8% of customers incur nearly 75% of all overdraft fees.

“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,” CFPB Director Richard Cordray said in a statement.

The report indicates there is still room for substantial improvement with overdraft fees in the banking industry.



The information contained within this article was accurate as of August 5, 2014. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.