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article imageBank overdraft fees hitting Millennials the hardest

By Karen Graham     Apr 24, 2016 in Business
Overdraft fees on checking accounts and debit cards are supposed to be a "courtesy" extended by financial institutions to cover those occasional times when we don't have the money to cover a purchase. Instead, they have become an expensive form of credit.
An occasional overdraft notice might cause some consternation with a few people, but for the most vulnerable members of the population, millennials, renters, and those earning less than $50,000 a year, overdraft notices amount to much more than just once in a while, and they can be devastating.
The Pew Charitable Trust's Banking Project released the results of their 2015 study on Heavy "Overdrafters" on April 20, and surprisingly, the results show that many people are leaving the banking system because of the high fees charged for overdrafts and non-sufficient funds (NSF).
Pew interviewed 302 heavy overdrafters or those bank customers with $100 or more in overdraft or NSF fees a year. Since 84 percent of banks charge $35 for an overdraft or NSF fee, this amounted to three overdraft notices a year. The Consumer Financial Protection Bureau (CFPB) points out that the average purchase that generated the fee was $50, and for a Debit card, only $24.
The figures showed that in most cases, customers were paying more in overdraft fees than the amount of the original purchase. On top of that, researchers found that almost one out of five banking customers (18 percent) are paying the vast majority (91 percent) of these overdraft fees.
"The heavy overdrafters we surveyed are very financially vulnerable," Susan Weinstock, The Pew Charitable Trusts' director, consumer banking project, told ABC News. Weinstock pointed out that 70 percent of heavy overdrafters earn less than $50,000 a year and overdraft fees can consume almost a week's worth of their income, and that amount can add up very quickly.
As a result of the high fees, many low-income families have opted to leave the banking system. According to the Pew survey, "31 percent of those without bank accounts confirmed that the high or unpredictable account fees were one of the reasons. Another 13 percent said it was the main reason." Added to this is the fact that overdraft fees can "snowball" because the customer may not know about the first overdraft for two or three days.
"The Consumer Financial Protection Bureau needs to enact new rules to limit the negative effects of these fees and ensure that overdraft is not being used as short-term credit," Weinstock said. And that is an interesting statement because most bank customers, over two-thirds, say they would rather have a transaction denied than pay an overdraft fee.
The survey also showed that overdraft and NSF fees are being used as an expensive form of credit, instead of the occasional courtesy for which they were intended. So do you think banks should lower their overdraft and NSF fees, and what kind of alternatives would you suggest?
More about Overdraft fees, vulnerable group, expensive form of credit, courtesy fee, Greek banks
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