In recent years, several reports from professional publications and media outlets have revealed an epidemic that is affecting bank consumers in the United States. The Consumer Financial Protection Bureau reported that U.S. account holders spent a total of $33 billion in overdraft fees in 2016. On average, one out of ten account holders spent more than a thousand dollars for overdrafts and approximately $300 on other bank fees.
Multinational financial institutions charge hefty overdraft fees on their consumers – an average of $34 per transaction, which is equivalent to a 17,000% overdraft loan. Meanwhile, the Pew Charitable Trusts stated in a recent study that some of the smaller institutions follow the price model and multiple fee charges of major banks. The result showed that 68% of the 40 million banking consumers prefer a denied transaction, rather than spending for overdraft fees.
These numbers have significantly influenced the profits of various monetary institutions while becoming a burden to cash-strapped consumers.
What is an Overdraft Fee?
Banks charge penalty fees for individual consumers who withdraw, spend, or make purchases more than the available balance in their accounts. This penalty fee is called an overdraft fee, and it is essentially a fine to cover the cost of the transaction.
Types of Bank Overdraft Fees
Listed below are four types of overdraft fees besides the standard overdraft charge of most banks.
1. Overdraft Fee
The Overdraft Fee occurs when consumers purchase an item that exceeds their available account balance. It is the most common fee that banks impose on checking accounts, and they may limit the number of transactions per day. Several banks offer numerous overdraft services which vary by institution.
The average overdraft fee for major banking institutions, like Citibank, TD Bank, Wells Fargo, and Chase is $34 per item. There are alternative banking accounts, such as Chime and Simple, that do not charge an overdraft fee.
2. Non-sufficient Funds (NSF) Fee
Banks impose a non-sufficient funds (NSF) fee when they decline a transaction which overdraws an account balance. When a consumer issues a payment check with insufficient funds in the account, the bank will reject the purchase and may charge an NSF fee to prevent the account holder from issuing further check payments with no funding.
Most banks charge a similar amount for overdraft and non-sufficient fee. The NSF fees for the Chase Bank, PNC Bank, and Wells Fargo Bank average $35.
3. Overdraft Protection Fee
The Overdraft Protection Fee or the Overdraft Transfer Fee is the payment charge of banks for every fund transfer transaction made to a checking account from a savings account or line of credit. The Overdraft Protection automatically covers an overdraft with the available funds from the linked account or credit card. Several bank institutions consider credit card settlements as a cash advance, so they impose an added cash advance fee of $10 of 3% of the transaction.
Most banks limit the amount of overdraft protection fees, charging only per day rather than per transaction. For example, Bank of America only charges a $10 Overdraft Protection transfer fee per day to their account holders for transferring available funds from their secondary accounts.
4. Extended Overdraft Fee
An Extended Overdraft Fee, sometimes referred to as “extended overdrawn balance fee” or “sustained overdraft,” is the amount that bank institutions charge on top of standard overdraft fees when account holders leave a negative balance in their account for five to seven consecutive days.
For example, U.S. Bank charges a $25 extended overdraft fee which starts on the eighth calendar day, and each week afterward if the account holder has $0.00 balance.
Why Do Overdraft Fees Occur?
Overdraft fees occur due to various reasons which include the following:
● ATM Overdraft – the inability for the ATM to communicate with the bank of the consumer, may lead to authorization despite insufficient balance.
● Intentional Loan – the voluntary overdraft of the consumer is called a short-term loan. ● Authorization Holds – purchases using a debit card will require the signature of the handler. It will commonly take one to five business days to approve the transaction. However, if a failure of permission occurs, the funds will be accessible to the purchaser which may then create an overdraft when spent.
● Bank Fees – Many banks have hidden charges which consumers do not expect. These fees are deducted from the balance of the account holder which can lead to insufficient funds or zero balance.
● Identity Theft – Fraud can cause an overdraft, especially if criminals subject an account holder to forgery, account takeover, or phishing.
How Much Do Banks Charge For Overdraft Fees?
Although the cost of an overdraft fee varies from one institution to another, some banks do not charge its consumers for overdraft, while some have easy-to-avoid overdraft fees. However, big banks charge their account holder an enormous amount of overdraft fees which can range from $35 to $40 per transaction.
Banks With No Overdraft Fees
Chime has no additional fees such as monthly maintenance charges, service fees, minimum balance fees, foreign transactions fees, and most especially overdraft fees. To prevent overdraft, any transactions which would result in a negative account balance will be declined by Chime.Furthermore, they ensure the account holders that they have no hidden charges for any transactions.
This bank partnered with two other financial institutions — BBVA Compass and The Bancorp — to provide FDIC-insured checking accounts to U.S. citizens. The founders designed Simple to avoid or minimize overdraft scenarios. It will decline or return any transactions which can cause an overdraft.
Banks With Easy-to-Avoid Overdraft Fees
1. Capital One 360
Capital One offers a variety of products and services such as checking and savings account, money market online, credit cards, auto loans, and overdraft options. It does not charge monthly fees, and they offer free checking and savings accounts with equal interest. However, its overdraft fees are quite high compared to other banks, which is why they included the Free Savings Transfer as an overdraft protection option. This feature allows Capital 360 to withdraw money automatically from the linked savings account if the balance of the account holder dips to zero. They ensure their consumers that there will be no charge in using the Free Savings Transfer.
2. TIAA Bank
TIAA is a Florida-based bank that provides numerous services from investing, banking, and mortgages in the United States. They also offer overdraft protection for purchasers who have insufficient balance in their accounts. To avoid overdraft fees, the account holder should register in High Yield Savings or Money Market accounts and link it with the Interest Checking accounts. However, TIAA Bank will only transfer money from the savings report in $100 increments, so if the account has an insufficient balance and cannot provide the minimum of $100, the bank will charge a $25 overdraft fee on the account holders. Furthermore, the feature only applies to debit transactions and checks.
Banks With Overdraft Fees
1. Wells Fargo
A multinational California-based financial bank equipped with extensive access to ATMs and efficient online and mobile banking experience. When Wells Fargo consumers purchase products with an insufficient balance on their debit cards, the bank will decline to the purchase. However, Wells Fargo charges their check account holders a standard overdraft fee of $35 with a maximum of three transactions a day (up to $105). They do not charge their customers an extended overdraft fee if their accounts remain negative or maintain a zero balance.
PNC provides an Overdraft Protection service which allows their account holders to link their PNC accounts to their respective PNC checking accounts. Usually, PNC pays overdrafts for checks, checking account payments, and automatic bill payment transactions on a case-to-case basis. The overdraft policies of PNC include a $36 overdraft and returned item fee with a maximum of four transactions a day (up to $144). Meanwhile, an extended overdraft fee of $98 ($7 per day) for 14 days will also apply if the available balance of an account holder stays on the red line for five consecutive business days.
How to Avoid Overdraft Fees?
Here are some tips to avoid costly overdraft fees on bank transactions.
1. Link Checking Account to a Savings Account
Financial analysts have advised account holders to link their checking accounts to their savings so that their own money, rather than the bank, will cover the deficiency.
Chime offers a feature which enables its account holders to connect their external accounts to the Chime Spending Account by logging into their online accounts. The process is simple. Select Move Money and tap Transfers. A prompt will appear on where consumers may input their other bank account information to link into their Spending Account.
Chime allows transfer fees of $200 a day and $1,000 a month, which will be available within five business days. Moreover, it supports a variety of external accounts including Wells Fargo, Bank of America, US Bank, Citi, PNC Banks, and Capital One 360.
2. Sign Up For Call Or Email Notifications From The Bank
Getting an alert from the bank will aid the consumers to keep track of their transactions and account balance. It will prevent the account holders from making transactions which can lead to unintended overdrafts.
The Chime mobile app will notify users immediately of transactions made on their accounts.
3. Consider Opting Out of Overdraft Protection
Several bank institutions offer overdraft protection which guarantees its consumers a lower fee of $10 to $12.50 per transfer compared to an average of $35 overdraft or non-sufficient funds (NSF) charge. It also ensures purchasers that businesses will not reject or decline a normal overdraft transaction.
Lawmakers created a federal law in 2010 which made opting out overdraft protection services as the default option for consumers. This action can lessen the overdraft fees for account holders when their balance is insufficient.
4. Avoid Spending More Than the Available Balance
The most convenient way to steer clear of overdraft fees is to avoid spending more than the available account balance. This, of course, requires you to keep up to date with your current balance.
Mobile banking offers an easy solution to this problem. With accounts like Chime you can check your account balance at any time from anywhere.