Americans Bring Lawsuits Regarding Overdraft Fees

By Lindsay Frankel
Inside Subprime: Oct. 7, 2020

For checking account customers who have trouble maintaining a minimum balance, overdraft fees can be a crippling expense. When a customer’s account falls below $0 due to a transaction, the bank covers the expense and charges the consumer an overdraft fee, which costs a median of $30.

Each year since 2015, the nation’s largest banks have collected more money in overdraft fees from consumers. In 2019, banks with $1 billion or more in assets drained $11.6 billion from consumers in overdraft fees, up 1.1 percent from the previous year. And this figure is only expected to increase as vulnerable consumers have lost income due to the pandemic. 

Unsurprisingly, overdraft fees have the greatest impact on people who have trouble keeping money in the bank. Pew found that heavy overdrafters tend to be younger, rent instead of own, and have below average incomes. For these customers, an average of a week’s worth of household income goes towards overdraft fees every year. 

How Americans Are Fighting Back

Several class action lawsuits have come up over the past few years that allege overdraft protection is deceptive and unjust. In most of these cases, plaintiffs complain of multiple overdraft fees for a single transaction. For example, in a new lawsuit against Ulster Savings Bank, checking account customer Rhonda Turner complained of being penalized twice for the same transaction

Turner’s insurance company attempted to withdraw $309.89 from her checking account, resulting in a $30 overdraft fee. Turner doesn’t dispute that charge, but does take issue with a second $30 charge that occurred when her insurance company tried to deduct the money again the same day. Turner also claims she was charged overdraft fees for transactions that she had the funds to cover at the time. Turner’s lawyers are planning to get class-action status for the case. 

And back in April, Earl Miller, Jr. filed an overdraft fee lawsuit against State Bank of Lincoln. The suit alleges that while checking customers agreed to one overdraft fee per transaction, multiple charges were leveraged from account holders. 

How to Avoid Overdraft Fees

Almost one third of checking customers who incurred overdraft fees reported using the product as a loan, according to Pew. But small installment loans are typically a cheaper alternative. The Consumer Financial Protection Bureau found that most overdraft fees are charged on transactions amounting to $24 or less and are repaid in three days. That means that if a customer were charged a $34 overdraft fee in exchange for taking out $24 in cash, that would translate to an APR of 17,000 percent

If you’re using overdraft protection as a way to borrow money, consider whether other alternatives to avoid overdraft fees in the future may better fit your needs. 

Consumers can follow these steps to help avoid overdraft fees in the future: 

  • Opt out. Many banks automatically enroll customers in overdraft protection for ATM and debit card transactions, but this type of overdraft protection is optional. If you choose to opt out, your debit card will be declined when you don’t have the funds to cover the purchase, but you won’t incur costly overdraft fees. 

 

  • Link your checking and savings accounts. Linking your checking account to a savings account can provide an alternative to overdraft protection. If you run out of funds in your checking account, your financial institution will transfer the money from your savings account to cover the difference. The transaction fee is usually modest compared to an overdraft fee. 
  • Track your balance and account for upcoming bills. Use a budgeting app to help you track your checking account balance, including upcoming bills. This will help you avoid making a purchase when you have insufficient funds. 
  • Sign up for alerts. Some financial institutions will automatically alert you when your checking account balance falls below a certain amount, but you’ll need to sign up for this service. You could also check your account balance online prior to making a debit card purchase or ATM withdrawal. 
  • Apply for credit. Ask your financial institution if you qualify for a line of credit or linked credit card to cover you if you overdraw your account. The fees and interest associated with this method of borrowing are much more affordable. 
  • Compare accounts. You have the right to compare financial products and choose the best account for you. Consider all the fees associated with maintaining an account, including overdraft fees, monthly fees, ATM fees, and other service charges. Do the math and choose the account with the lowest overall fees. This might mean switching to a new bank or credit union. 

 

For more information on the middle income consumer, subprime loans and payday loans, see our city and state financial guides including states and cities like California, Texas, Illinois and more.