Bank of America hit me with my first overdraft fee a few weeks after I deposited my first check. It was a smoothie from Jamba Juice that did me in.
I was 17 years old, still in high school, and making $7.25 an hour working at a Gap in Los Angeles. I went over my checking account balance by $2 and was hit with a $29 fee. I had to work four-and-a-half hours to pay off that single Caribbean Passion smoothie.
I continued to miscalculate my bank account balance throughout college. Often I overdrew right before I got my next check and I’d pay the overdraft fees in a day or two.
It didn’t matter if I overdrew by $1 or $25; the fee was always the same. And the worst was when I would overdraw my balance on more than one transaction. Each one got hit with an overdraft fee, which meant that a handful of times I ended up with a negative balance in the triple digits.
I am far from alone here. U.S. consumers in 2016 paid a total of $15 billion in fees for bouncing checks or overdrafting, according to a Consumer Financial Protection Bureau (CFPB) analysis.
These fees disproportionately hit the most vulnerable—again and again.
A 2014 CFPB study showed that about 8% of bank customers pay about 75% of all overdraft fees. According to a 2014 Pew Charitable Trust study, people of color are 83% more likely to pay an overdraft penalty fee than white people.
I take full accountability for my overspending. I get it. I fucked up. But exorbitant overdraft fees are less about encouraging personal responsibility and more about greed.
And overdraft fees bear “virtually no relation” to the actual cost of the bank covering the overdraft, according to a report from the Center for Responsible Lending. Say you overdraft your checking account by $24 and three days later you paid today’s average overdraft fee of $34. That translates to a whopping 17,000% annual percentage rate.
It is time to ban overdraft fees because they don’t protect account holders. They only protect bank revenues. And so-called overdraft protection programs are an insane form of predatory lending that hit young people and people of color the hardest.
Most people pay their overdraft fees within four days of being charged with the fees—31% of overdrafters pay the fee that same day, according to the Pew Charitable Trust study. About half of the banks analyzed in the Pew study actually had “extended overdraft fees,” an additional charge for overdrafters who don’t repay their negative balance within five days.
The overdraft notices that arrived in my mailbox regularly came in the form of a postcard-size letter with the security-tint patterns printed on them to protect me from the shame of being poor. The notices highlighted the culpable transactions I made and what I owed the bank, but there was no information on how to actually avoid the fees. All I knew I could do was my call my bank and beg them to remove the penalty. It actually worked sometimes, probably because the operators knew this shit is fucked up.
It took me years (and thousands of dollars) before I figured out that I could opt in to link my checking account to my savings account to avoid the outrageous overdraft fees.
Once I linked my checking account to my savings account, my bank automatically transferred funds into my checking account to cover the transactions—the bank still charged me a fee, but it was a more reasonable $12.
And those who don’t have the luxury of being able to dip into a savings account can link a bank credit card to their checking account or just opt-out of “overdraft protection” and have transactions declined when funds are insufficient.
Sometimes I’d have to call my bank and remind them I had linked my checking account to my savings account. There were a handful of times where the bank still tried to charge me overdraft fees.
Given the option, most overdrafters say they’d rather have transactions declined. A Pew survey found 68% of overdrafts said they would prefer that a transaction be declined rather than having to pay a penalty of “$35 or so.”
But interest rates are so low that both small and major banks rely on revenue from overdraft fees to make up for the profits not seen in other types of loans. And when banks rely on revenue from overdraft fees, they’re going to do their best to put you on the path of overdrafting.
For instance, some of the nation’s largest banks don’t process debit card transactions chronologically. Instead, they post charges from high to low—which, you guessed it, leads to more overdraft fees.
Let’s say you have $25 in the bank on Friday morning, so you go and buy a $3 cup of coffee. Then, late Friday evening, you go out to eat with friends and you spend $29 on dinner. Technically, you had enough money for coffee in the morning, but you went overboard hours later with dinner. But because banks can reorder transactions and process them in any order they want, they can process dinner first and leave you with a negative balance. So by the time they process the coffee transaction you’re left with two overdraft fees instead of just one.
All of this points to a system that desperately needs reform. And the government has tried to regulate overdraft fees. Tried.
A federal law that went into effect in 2010 requires banks to give consumers the option to “opt in” to overdraft protection programs. The regulations acknowledge there’s a problem, but they’re clearly not protecting consumers enough because every year, banks make more and more money from overdraft fees. The average overdraft fee has also gone up for the past 15 consecutive years.
There are some things you can do to protect yourself from these unjust fees. The Consumer Financial Protection Bureau obviously suggests tracking your balance and signing up for low-balance alerts. Also look into linking your checking account to a savings account or a line of credit. And make sure you opt-out of “overdraft protection,” because the only thing being protected is your bank’s revenue.
But the best and most obvious solution for all of this is for overdraft fees to be banned completely.