News: On Dec. 1, banking giant Capital One announced it is eliminating overdraft and non-sufficient fund fees for all consumer checking accounts.
WHAT IT MEANS TO YOU:
You know how easily it can happen. You pay for groceries or gas or some other necessity with your debit card. Then an automatic payment you forgot about goes into your account. All of the sudden, you’re overdrawn. The bank charges a fee. Then another payment goes in and since you have $25 (or $28 or $35) less in your account than what you’d budgeted, there isn’t money for that payment. You get charged another fee.
Banks don’t have to notify you that your account is overdrawn, and they can charge multiple overdraft or NSF (non-sufficient fund) fees in one day.
The domino effect puts your bank account into chaos that can take all month to sort out. It also can have long-term effects, like not having money for rent or food because you’re paying for fees that you hadn’t anticipated. Ultimately, the bank may close your checking account.
Overdraft and NSF fees in 2019 made $15.47 billion for banks, according to the Consumer Finance Protection Bureau. The amount was slightly less in 2020 — economists say that’s largely because stimulus checks and the extended child tax credit helped low-income Americans pay their bills.
In may seem like an obvious point, but it’s worth making anyway, that those most harmed by the fees are people who don’t have a lot of money.
Those hit hardest by NSF fees carry an average of $350 in their checking account and have small deposits, according to the Center for Responsible Lending. A 2019 study by the center found that losing a bank account because of too many NSF fees can have long-term effects on finances, particularly for Black and Latino consumers, who “are disproportionately harmed by ejection from the financial mainstream.”
People who don’t have bank accounts have to look for other places to cash paychecks, pay bills or borrow money. These places often charge for services that banks offer for free. This has a big impact on the ability to build wealth for people who most need to, keeping them in a low-income spiral.
Many banks temporarily eliminated overdraft and NSF fees during the worst of the COVID-19 pandemic. With no fees, payments that can’t be covered by the money in an account are declined. Capital One so far is the only one of the nation’s big banks to permanently eliminate the fees. Other smaller banks have done it as well, but may have not announced the fact.
Some banks that haven’t outright eliminated the fees have made other changes, such as a one-day or one-week grace period for the bill to be covered before a fee is charged.
Your bank is supposed to make sure you can opt in or out of overdraft protection. That said, you may not be aware if you have it. And having overdraft protection doesn’t mean there are no fees. Usually, this protection is linked to another account that will pay the bill if there isn’t enough money in the checking account. The Consumer Financial Protection Bureau found that people with overdraft protection actually pay more in overdraft fees than those without it.
Another issue is that some banks’ overdraft protection only covers checks and debit payments, and the bank will still charge an overdraft fee for automatic payments that can’t be covered.
WHAT YOU CAN DO:
While you’ll often hear that the simplest solution is to not overdraw your account in the first place, when you live paycheck to paycheck you know it’s not that simple at all. But here are some things you can do no matter what your income:
- Find out what your bank’s policy is and what it means for your account. You can generally find this on the bank’s website.
- Set up text or email alerts – most banks have these – for when your checking account reaches a certain minimum, like $50.
- Keep a record of when automatic payments go into your account, so you don’t lose track of them. If possible, set them all up for the first of the month or another date that you can keep track of.
- Shop around for a bank with a better overdraft or NSF policy.
- Set up and follow a monthly budget (and again, be aware of when automatic payments will hit).
There are bills before the U.S. House and Senate that would require banks to only charge one fee a month and six a year, force lenders to be more transparent about overdraft fees and more. But neither has gained any traction (including having no co-sponsors from New Hampshire). Bank reform is a hard sell with politicians, so it’s important for you to take your banking power into your own hands.
It’s Your Money is a regular feature in the Inklink to help you navigate financial news and how it affects you and your money.
