The Center For Responsible Lending has put together a report that examines the disastrous effect of overdraft fees on Americans who depend on Social Security for all or part of their income. Despite the fact that they’ve had checking accounts all their lives (and presumably know what they’re doing), each year older Americans pay 4.5 billion dollars in overdraft fees– and on average they actually pay more in fees than they receive in credit when the overdraft is triggered by a debit card transaction.
The average debit card transaction triggering an overdraft is for a $26 purchase. For this transaction,the bank makes an average loan of $19.95, or the amount overdrafted, and charges an average fee of $33 for each incident. This amounts to an average of $1.65 in fees per dollar borrowed. Thus, older adults pay more in fees than they receive in credit for the average debit card purchase triggering an overdraft.
Since Social Security payments are disbursed only once a month, a consumer on Social Security can rack up substantial daily balance fees waiting for her next check– trapping her in a cycle of overdraft fees and debt that’s eerily similar to a payday loan scenario. If the consumers on Social Security were instead given a line of credit they could avoid this cycle of debt.
The Center for Responsible Lending illustrates this difference by sharing the story of Mary, a real consumer entirely dependent on Social Security:
Mary begins the year 2006 with $420.56 in her checking account, held at a large national bank. She makes a $380 ATM withdrawal and several smaller point-of-sale purchases on January 3, comes up short, and is overdrawn by January 4. She incurs a $34 overdraft fee for the initial overdraft. After two more purchases, and two more overdraft fees, she finds herself almost $200 below zero on January 9. For the next eleven days, Mary doesn’t spend any money from her checking account, but her checking account loses money, nonetheless. Her bank charges her a fee of $7 a day because of her ongoing negative balance. By the time a scheduled electronic withdrawal is made to pay a bill for $32.38 on January 20, Mary’s account is overdrawn by more than $300, and the bank rejects the transaction. Her bill goes unpaid, although the bank continues to charge daily negative-balance fees.
Finally, on January 25, Mary receives her monthly Social Security check of $904. However, her account is already $335 overdrawn and she still has an additional $500 in expenses for the month. Once these payments are made, Mary only has $31.09 left to live on until her next Social Security check comes in late February. Because of this, Mary almost immediately has a negative checking account balance again, once she makes three small ($20 or less) purchases on February 1. Over the next two days, Mary incurs two overdraft fees because of these purchases and conducts another transaction for $50, which also results in an overdraft.
Mary does not make any more purchases between February 8 and February 17. However, the bank again continues to charge her a fee of $7 a day because of her ongoing negative balance. On February 18, an automatic bill payment causes Mary’s account to go even farther into the red—a transaction that the bank approves even though her account is already below zero and she cannot even repay the $7 daily negative balance fee. Once Mary’s account dips to $314.91 below zero, the bank finally begins to refuse additional transactions, rejecting a utility bill for another month. The $7 daily negative balance fees continue to be assessed through February 21.
Finally, on February 22, Mary’s Social Security check comes in, and the account balance ends up above $400 once the bank subtracts the overdraft fees. Unfortunately, because Mary still has to pay her end of the month expenses totaling about $410, she is left with only $18.48 to tide her over until the end of March. This meager sum—even less than the $31.09 she had to make ends meet after being charged for overdrafts in February—virtually guarantees that Mary will continue to remain trapped in a cycle of accumulating overdraft fees month after month. In January and February, Mary paid $448 in overdraft fees in return for receiving $210.25 in credit from her bank, and was forced to live on $20 from a Social Security check of nearly $1,000. If Mary’s bank had instead offered her an 18 percent APR line of credit to cover overdrafts, she would have only paid about $1 in total fees for her overdrafts.
As you can see in the graph above, if Mary would have been offered a line of credit, she would have ended up with $420 at the end of two months and would have been able to pay her utility bills.
The Center for Responsible Lending is working to stop banks from being able to automatically drain Social Security funds from checking accounts, but the important takeaway for us is this: It’s important that you or your family consider switching to a bank that allows you to link a savings account or offers a less expensive line of credit so that you can avoid these fees — particularly if you or your loved ones are retired and on a fixed income. There will likely be a fee for this service, but when you consider the alternative, it may be a wise choice.
Here’s some basic information about overdraft protection from Bankrate. You can also compare accounts and overdraft fees with Bankrate’s checking account finder.
Shredded SecurityOverdraft practices drain fees from older Americans (PDF) [Center For Responsible Lending via CL&P Blog]
(Photo: michael.kinne )
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@Pylon83:
Lest we all forget, “Mary” is a hypothetical case, a computer model, so there is no old lady being kicked while she is down here.
On the other hand, you show a lack of historical perspective here. It’s nice to see your built-in assumptions of equality for women extending even to the responsibilties of equality rather than just the benefits, but those assumptions aren’t always valid. If she’s 70, she probably got married and had kids in the early 1960′s or so. In those days, women usually left the family’s finances to “the man of the house”. My mother is in that rough age range and she didn’t even get her driver’s license until I was about 8 years old and she was about 28. Granted it’s been 40 years that “Mary” could have used to educate herself (which is what my mother did), but there are plenty of traditionalists who never did.
Even if she had learned how to take care of herself, there’s a fair chance (probably around 30%) that she has lost the capability due to disability. For example, said mother has macular degeneration and she has to put everything on auto-pay now because she can’t read the bills anymore. If someone starts playing funny games with the billing dates and amounts, she could find herself in a similar situation.
It’s interesting to observe the collision of cultures here between the posters sympathizing with the lady.
Oops. Abort, Retry, Ignore? Go ahead and sympathize with “Mary” all you want. Call me stupid and drain my bank account, while you’re at it..
Wow! Only in America would people side with a giant corporation against a 70 year old lady! I don’t know about you, but most people NEED to have a checking account and also have very little choice in who they bank with because all of the big banks have bought up all of the little banks which used to be more customer oriented. Why no sympathy for the old lady?
The fees charged by banks for overdraft loans are excessive. Sometimes I miscalculate my account balance in my register and am only $1-$5 in the negative. If I make a purchase of a soda or sandwich at lunch for $1 or $3, I still get hit with a $39 overdraft fee which is over the top. On other occasions, a bar or restaurant may “withhold” more money from my account (in pending transactions) than the amount of the actual purchase, sending my account into the negative. It’s situations like these that make it difficult for people who are already living from paycheck to paycheck to get ahead. Let’s face it – even the order in which transactions go through are manipulated for maximum number of overdraft fees. It’s not always the consumer’s fault that they find themselves in a cycle of debt – the system is often rigged to give banks the maximum profit possible. It’s time we did something about this. I’ve likely paid my bank $3,000 is 7 years as a customer because of this overdraft program (and I wasn’t informed of the possibility of applying for an overdraft protection line of credit until it was too late).
I don’t think the point of this article was that Mary can’t manage her money it’s more that people with a fixed can become trapped in a cycle of debt perpetuated by the banks. The banks have set up a system whereby they can charge large amounts of money for simple errors by consumers. Daily overdraft fees, allowing multiple overdrafts and authorizing payments without available funds are the big issues. Even working within a budget mistakes are made and these policies make those mistakes more costly than is reasonable.
Mary’s example is a perfect representation of how a single mistake can snowball into a large debt. The bank was authorizing these overdrafts under the guise of offering credit to complete purchases. There is very little benefit to the average person in letting these overdrafts occur. If you were short a dollar to make a purchase would you borrow it from someone under the condition that you pay them an extra thirty in return? I don’t think so. Most of the time these banks are not that transparent, even if they are some don’t give you the choice to opt out of these sort of programs.
This isn’t a problem for most people. It isn’t for me at this point in my life. I am lucky enough to enjoy a good income and don’t spend beyond my means. I haven’t always been so lucky. During my time in college I was on a set income and even though I managed my money meticulously I had close calls and managed to overdraft once or twice. It’s easy to say now that those situations will never happen again, but I remember what it’s like and how the system is built not to protect you but gouge you. One mistake and there goes your money for books, tuition, gas. No gas, no class and if you live in the burbs no job. When you’re popping iron supplements so you can donate blood one more time just to make ends meet you tend to wonder why the system is set up this way.
Say what you like about the United States, it’s a great place to live. I believe there are more opportunities here for any person regardless of race, gender or class than anywhere else in the world. One of the principles it was founded on was the idea that people are entitled to life, liberty and the pursuit of happiness. While no where are these things guaranteed, there comes a time where we have to ask ourselves are we as a country doing everything we can to promote these ideas and offer someone every chance to succeed. In this case, I think the lack of regulation in the areas of banking and credit are falling short and ultimately hurting the average person. In the end, that will just hurt the economy.