Like many things, the mechanics and semantics of financial services rarely align and are typically outlined obscurely in size 8 print after a bunch of buzzy marketing jargon. The term “political spin” can just as readily be applied to predatory financial products. Overdraft fees are no exception.
What an overdraft “fee” actually represents, it essentially a short-term loan. The bank is “lending” money by allowing you to go into a negative balance in exchange for a flat fee. This fee, or “loan”, is charged at the same rate regardless of how much you actually overdrafted. Because of the flat fee structure, the amount a consumer pays for this “loan” in proportion to what they are “borrowing” makes for an outrageous effective APR.
Average Effective APR of an Overdraft Fee = 4563%
Assuming the common overdraft fee of $35 resulting from a negative balance of $20 (conservative estimation from CFPB), and a 14-day payback period (time between paychecks), the effective APR for this mishap would be a whopping 4563%. An equivalent payday loan APR would not even be legal in the majority of states (the maximum authorized payday loan APR is in Missouri at 1950% while other states such as Wisconsin, Utah, Texas, Nevada, and Delaware don’t even have limits). What’s worse is that because of the flat fee structure, the less you overdraft, the more you end up paying as effective interest. For example, overdrafting by $5 with the same fee and payback period results in an effective interest of 18,250%. You can see what effective interest you might be paying on your overdrafts in the calculator at the bottom of the page.
Breaking the Cycle of Overdraft/NSF “Loans”
With more than 39 million Americans incurring an overdraft or NSF fee/loan in the past 12 months, the plight of the masses has become the margin of the few. Americans shelled out over $34 billion in overdraft fees alone in 2017, with Chase bank holding the largest fee-per-account average, at $91.68 per account.
So what can someone do to prevent or recover these fees at these criminal rates? Here are seven tips:
- Make sure the funds are available. If you are ever unsure of making a transaction that will create a negative balance, make sure to check your account before using a debit card. A common dilemma is expecting a paycheck to hit a bank account at a certain date/time without verifying that the funds are actually available. Another common cause are auto-subscriptions for services (like a cell-phone bill) that may have been overlooked when planning weekly or monthly finances.
- Leverage the services of companies like Harvest that use the latest technologies to negotiate refunds on your bank fees 24/7.
- Complain! Fortunately, agencies like the Consumer Financial Protection Bureau exist in service of the public to help protect against unruly fees. Below is a chart that shows the various complaints and bank responses related to bank fees.
4. Ask! You can call your bank and explain the circumstances surrounding a particular fee. Depending on a variety of circumstances, the bank may or may not be able to grant a refund on the spot.
5. If you incur such charges frequently, move to consumer-friendly banks that do not charge overdraft or NSF fees.
6. Repair and build your credit; you will have more leverage to get lower credit card APR rates, negotiating power with your bank, and better financial standing all around.
7. If your bank fees are extremely high and you are not in a position to pay off the bank, speak with the bank’s collections department to set up a payment plan. Otherwise, you may be unable to open up another bank account in the future. Lack of payment gets reported to Chexsystems, a reporting agency that banks use to share information on consumers that have defaulted on their bank fees.
It’s unfortunate that the banks we are supposed to trust often place a veil on some services simply by calling it a different name. By thinking about fees as loans, we can be better informed, cautious, and wiser about planning our daily finances. Learn more about your fees and debts with Harvest, where we dive into a variety of personal finance concerns and how you too can use the latest technologies to protect your finances against sneaky fees.