Surprise! Overdraft Fee!

Hey there Money Saver! Welcome back to another week of How to Save A Buck, where we explore ways of saving money in personal finance, credit cards, and investing! Check out my archive here!

Overdraft fees suck.

Ever felt the sting of an unexpected one hitting your bank account?

You're not alone.

Fees can range from a few bucks to as much as $35, no matter how much the overdraft amount is.

And this happens to 23 million US consumers each year.

The government wants to change all of this with a new rule.

So, what’s the rule? How will it affect consumers? Why are banks so upset? And how can you save money from this overdraft nightmare?

The Consumer Financial Protection Bureau (CFPB) proposed a new rule that limits how much banks can charge for overdrafts. Some key points:

• The rule aims to reduce overdraft fees, potentially saving customers $3.5 billion annually

• Large financial institutions can choose a flat fee based on a benchmark or provide disclosures similar to credit cards

• The rule targets institutions with over $10 billion in assets and aims to close a loophole in consumer protections

• Around 23 million U.S. households paying overdraft fees could save $150 each, with the rule expected to be finalized in 2025

You may think that banks are simply defending their good name, as they cover the funds that you mistakenly thought you had. However, the overdraft protection that banks offer has skewed into a questionable practice.

In December 2023, Atlantic Union was ordered to refund at least $5 million in illegal overdraft fees and pay another $1.2 million to the CFPB’s Victim Relief Fund.

In 2022, Regions Bank was ordered to pay over $190 million for surprise overdraft fees - even in cases when the customers had enough funds in their accounts! Uhm, WHAT?

Banks are not happy with the rule proposal. Not surprising!

The Consumer Bankers Association—which includes executives from JPMorgan Chase, Wells Fargo, and Capital One—called the proposal “misguided” and urged the agency to “reexamine the cumulative impact of these regulations.”

Not sure many banks (if any) of this size will get hurt by limiting the overdraft fees they can charge or recoup.

I worked at a bank and reversed many overdraft fees.

The bank employed a computer system that would determine if the fee could be reversed or not.

The decision examined their banking behavior, such as previous fees/overdrafts, transactions, and the value of the customer.

I estimate about 80%-90% of the time, the fee (usually $25) was reversed immediately.

Avoiding Overdraft Fees: Your Strategy

So how can you save or spare yourself from the overdraft overlords?

1. Opt-Out of Overdraft Protection: It may seem like a safety net, but it can allow banks to charge steep fees. If your account balance can't cover a transaction, it's better to have it declined than to face the aftermath of overdraft fees. (Prepaid debit cards act similarly.)

2. Monitor Your Account Regularly: Ignorance is not bliss when it comes to your bank account. Regularly monitor your account balance to stay on top of your finances. Many banks offer mobile apps that make it convenient to track your spending and check your balance on the go.

3. Set Up Alerts: Take advantage of technology by setting up account alerts. Most banks allow you to receive notifications when your balance drops below a certain threshold or when a large transaction occurs. This is your warning system!

4. Link Accounts for Overdraft Protection: Have multiple accounts at the same bank? Some banks offer overdraft protection by linking your checking account to a savings account or a line of credit. It doesn’t eliminate the risk, but it can help cover overdrafts without incurring the same hefty fees.

5. Understand Your Bank's Policies: Knowledge is power. Know the overdraft fee amounts, and the circumstances when they are charged.

6. Negotiate with Your Bank: If you find yourself facing an overdraft fee, don't be afraid to negotiate with your bank. Just like the customers I assisted, visit or call your bank, and see what can be done to reverse the fee. Many times, a reversal only requires your investigation. Poof! Gone!

Overdrafts suck. By opting out of overdraft protection, setting up alerts, and negotiating when needed, you can eliminate them for good. Hopefully, the CFPB’s rule will further prevent the practice from getting out of control.

Considering we insist on education and being disciplined in the world of personal finance, we hope you don’t fall prey to these tactics from your bank!

Reduce these fees to zero and invest them instead!

Save On,

Chris