‘Frequent overdrafters’ more likely to have subprime credit scores, study finds.

Inside Subprime: August 22, 2017

By Caroline Thompson

A recent study from the Consumer Financial Protection Bureau found that people who make more than 10 overdrafts on their checking accounts every year are more likely to have credit scores under 600. The study looked at the overall effect of bank overdraft fees, a practice which cost consumers a combined $15 billion in 2016 alone, and found that people who overdraft often typically worse off financially than those who don’t.

This is perhaps unsurprising, given that the average overdraft charge is around $35 per overdraft transaction. While banking industry insiders say allowing customers immediate access to funds is a good thing, these charges can add up quickly, making it hard for people who are already financially stressed to get back on their feet. When you’re forced to pay $35 per overdraft, no matter how small those initial transactions are, you can rack up hundreds of dollars in fees in a very short time. To add insult to injury, banks like Wells Fargo and Citi have, in recent years, been accused of reordering customer transactions in order to trigger as many of these fees as possible.

According to journalist Joesph Miner, this shady practice works like this:

“There’s $100 in your account, with charges for $75, $25, and $125 all coming through on the same day and in that order. Now, if the $75 charge and $25 charge clear first, your balance will be $0 and you will only overdraft when the $125 charge hits. But, if the bank shuffles around the transactions so the $125 charge hits first, your account immediately goes into a negative balance. The remaining two transactions ($75 and $25) will then both incur overdraft fees. Let’s assume your bank charges $35 for each overdraft. In the scenario above, with the original order of transactions, you incur a single $35 overdraft fee. In the resequenced order, those fees jump to $105.”

In 2010, new federal regulations were passed that required customers to opt-in before banks could allow overdraft transactions to go through, instead of just denying the charge for lack of funds. But this legislation ended up being problematic, as banks called this new service “overdraft protection,” and many customers thought signing up for it would prevent overdraft transactions from taking place, when it really meant the opposite.

According to the CFPB report, opting in to overdraft “protection,” leads to much higher costs for people who find themselves frequently overdrafting:

“Those who have opted in typically incur 22 overdrafts per year, compared to 18 for those not opted in – not a very large gap,” said CFPB director Richard Corday in a press call earlier this month. “But the difference in costs can be huge: frequent overdrafters who have opted in are typically charged 18 fees a year, compared to only 5 for those not opted in. With a fee of $34 per event, this amounts to almost $450 more in overdraft fees each year.”

The CFPB is suggesting banks embark on an education campaign to help customers better understand the consequences of opting in to overdraft services.

To learn more about credit, credit scores and how to boost yours, check our our Credit Workbook: The OppLoans Guide to Understanding Your Credit, Credit Report and Credit Score recent eBook on understanding your credit score, and click here to learn more about credit-building personal loans.

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