Overdraft Fees Are Trapping Consumers On Social Security In A Cycle Of Debt
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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Comments:
C'mon Mary!! You're f***ing it up for all of us!
Debit cards are a bad idea - especially if you don't bother to balance them like you would a checkbook. Just say no to debit, especially if you would have serious problems paying off an overdraft. Credit cards would be a better option, both to minimize fees and to give the person on SS more flexibility on exactly when they pay their bill.
Are they hinting that people on Social Security should be treated differently than someone who works and still is on a fixed income? Sounds like a little checkbook 101 is in need here. Change banks if they charge you seven dollars a day for a overdraft, you arent chained to them? Even though I agree that banks can be greedy it is still up to the user to take charge!
If she's withdrawing $380 from an ATM, Mary's name might really be Mary Jane
This is a compelling idea - ING Direct already does this by offering an overdraft line of credit, but I'm sure most banks don't.
Obviously, Mary's situation could be avoided by NOT OVERDRAFTING HER ACCOUNT, but the ripple effect of one bad transaction is terrifying here. People do make mistakes, and it shouldn't be the end of your solvent financial life if you overdraft once.
What the Center for Responsible Lending is forgetting, though, is that the Overdraft Line of Credit isn't as profitable as assessing fees like the dickens, which is the real problem here. Banks make billions off fees that have no basis in real-world cost.
It doesn't cost much, if anything, to continue to show a negative balance in your account - yes, they're floating you $24 or something, but that doesn't justify $7 per day charges until your account is above zero again.
I have little sympathy here. How do you get to be 70ish years old and on SS and never have learned to manage money? Further, if the SS isn't enough to cover your bills, maybe it's time to get a job.
Perhaps this will get some overdraft fee reform legislation started. The banks are seriously robbing us of our money. What happened to the days when they were grateful to have OUR money for THEIR use?!
@Pylon83: You're not terribly familiar with the way family structures used to work are you? I used to have an elderly couple as neighbors. When the husband finally passed, their son had to show his mom of 76 years how to pump gas. She'd simply never done it before. If Mary from the example above was in a similar situation, she may not have balanced the checkbooks, and quite possibly never had any idea of what their finances were.
She also could just be very bad at balancing her checkbook.
What happened to the days when they were grateful to have OUR money for THEIR use?!
Well in these incidents the people are over drafting. You can't lend much on a negative balance.
"Mary" should just take as much cash out of her account every month that she needs to cover her bills and other expenses then this problem would be easily solved.
Wells Fargo will let you borrow in $20 increments for a $2 charge per $20. All you have to do is have a deposit within 35 days that covers what you borrowed. This is a hell of a lot cheaper than paying overdraft fees and negative balance fees.
What the hell is up with those negative balance fees, anyway? Does the bank suddenly have to do manual accounting with ink wells and feather quills when an account goes negative?
"If the consumers on Social Security were instead given a line of credit they could avoid this cycle of debt."
No, wrong. Using a line-of-credit is still getting into a cycle of debt, just at a lessor pay-back amount.
Debit cards = usually bad.
My bank (in a sizable working class city) offered a free seminar to senior's for "budget planning" at each of our branch locations, and guess what!...even with notices at the local senior centers, 5 branches had no takers, and only a handful at the main-office location.
Live and learn, or live and pay-up.
Yeah, Mary needs a credit card or to borrow some money from the kids.
This is odd. Most older people I know, especially those on a fixed income, are anal about their record keeping.
We managed to put a stop to overdraft fees by micromanaging our debt/checking account. When there was a series of events that put everyone in a time squeeze at the same time it was payday and time to pay a bunch of bills - ta-da, we incurred an overdraft.
The real issue isn't as much getting people to learn how to defend themselves against the crazy system the banks have set up but stopping some of the worst of the worst practices.
The $7 a day additional fee for being overdrafted should be illegal. I don't have a problem with banks using overdraft fees but they need to be reasonable, not an excuse to rob someone blind.
Our bank did what many did. They did away with the optional overdraft line of credit or overdraft protection. They also did away with the option of having your checking account try to pull money out of savings if you go over. They did away with all the safety nets and jacked up the fees. Of course this was done at a time where having banking services is more mandatory than ever before.
@bohemian:
None of these things are problems if you don't overdraft. Manage your money and don't spend more than you make/have. Seems pretty simple to me.
Are there really that many seniors with debit cards?
Seriously?
@Pylon83: I can't wait till you get older and have to pay child support since you're so wealthy and pay for your kids college and their cars and insurance and your house and still pay your own bills with no job because you're old with a bad back and arthritis. And then find out that social security doesn't exist anymore. Oh yeh and then the bank charges you overdraft fees. I'm assuming with that attitude, divorce and child support is in your future.
@hi: That was a little uncalled for. Pylon83 is right. This issue isn't always as simple has Pylon said, but the comment was correct.
No plans to have kids, too expensive. I also think that people should be responsible enough to not spend more on their kids than they make and shouldn't rely on Social Security to take care of them when they decide to retire. And I'm not even remotely wealthy, but I can manage the money I do make very well and have NEVER over drafted an account. It's all about management and responsibility.
@InfiniTrent:
I have yet to figure out why people feel the need to resort to personal attacks in these situations. Why can't people debate an issue that they have different views on without cutting down the other person?
As one poster here said, many of these folks have in fact never had to - never been allowed to! - manage their own money before. Also, in many cases, their sight is failing - my dad had to balance my grandmother's books because she would make mistakes, not because she was careless, but because she had trouble doing the math when she couldn't see the numbers clearly. Many elderly people aren't lucky enough to have someone to help them like that. Many are suffering from low levels of senility that also make this chore more impractical, but again - who's there to take over for them? As well, it's easy enough to say, don't spend money if you don't have it. Well, tell that to the person who needs $80 for her heart medication. Neither of my grandmothers were spending frivolously. I don't mean they were eschewing lattes at Starbucks. I mean they weren't buying their grandkids Christmas presents. My grandmothers were lucky to have kids and grandkids who would give them anything they needed, but both were too proud to take much; so my father and his sisters would take his mother shopping for groceries once a month, or slip phone cards into her purse. Every cent of my grandmother's social security and pension went to her (highly subsidized one bedroom efficiency) apartment, utilities and medical bills. If she had not been lucky enough to have people to pick up the slack for her, she would have either been be in debt, or dead of starvation.
This isn't careless spending, folks. This is survival. Social security does not provide enough to live on, even with subsidized housing and Medicare. My grandmother tried to make up for her kids helping her financially by babysitting her grandkids, but if she'd had to work to make up the difference - she was *way* too frail toward the end there to do that.
Don't teachers only get paid once a month too?
@Pylon83: That's funny your comment was about "Mary" correct? Or maybe everyone who is 70'ish years old.
To quote you:
"I have little sympathy here. How do you get to be 70ish years old and on SS and never have learned to manage money? Further, if the SS isn't enough to cover your bills, maybe it's time to get a job. "
and then...
"I have yet to figure out why people feel the need to resort to personal attacks in these situations. Why can't people debate an issue that they have different views on without cutting down the other person? "
whatever ...
this is reason to cash teh check at a grocery store and stuff the cash in your mattress.
$7/day? disgusting. and 70 and get a job? christ i hope the people that say that drop dead at work because that's obviously what they hope others do.
Stop overdrafts and you're set. OK? Done. kthxbai
True, they should be more responsible and learn how to budget, etc. But, do not forget that people on Social Security get their payment on the same time every month. You may get paid every week or every two weeks, but how about trying to handle once a month on the same exact day. This has actually changed now, Social Security is now doing it based on your SSN and the second, third, or fourth Wednesday of the month, making it far more variable.
You have to learn how to budget and get your bills to fit accordingly.
For the elderly, who have enough trouble remembering to take their medication, this can be a daunting task.
@hi:
There is a difference between the commenters attacking the OP and the commenters attacking EACH OTHER. That was my point. I think when a story is posted for dissection, it's appropriate to question and attack the story. However, I think it's inappropriate for me to attack YOU because of YOUR take on the story.
@ShadowFalls:
We all have difficult tasks that we accomplish each and every day. I fail to see why the task of managing money is insurmountable.
@katylostherart: That's my plan. I don't bet on social security being around when I'm 65, and I sure as hell don't think I'm ever going to retire.
I feel bad for these people, but that doesn't necessarily mean it's my fault they're in the situation, or that I somehow have to be the one to lift them out of it.
Sucks that Mary didn't have a retirement plan. One way to avoid overdrafting? Don't live beyond your means.
@Pylon83: Actually I was standing up for the older folks that you were attacking. You think it's bad for me to attack one person personally but you feel it's perfectly legit to generally attack an entire age group. I can think of many reasons you're logic has failed. Think about how some people attack an entire race of people and maybe you will understand.
@mandiejackson: sucks that most employers didn't give retirement plans to women when she was joining the work force. too bad she got old before that.
@katylostherart: There's nothing wrong with working at 70. Retirement is not a right. It is a luxury that comes with planning and responsibility.
Don't you think that if Mary COULD get a credit card she would? No, I guess she just loves paying the bank a percentage of her fixed income every month. She feels sorry for the Poor banks.
@Pylon83: Translated: Beating up on a 70-year-old woman is just fine, and don't you say anything bad about me for doing so.
I think that pylon83 is a selfish person who has never had to do without. In these days and times people just don't have enough money to retire. God help you when you reach retirement age. I hope that you have plenty of money because you are going to need it. Selfish people do not have anyone to help them when they get old. Of course, you don't need help because you are so wonderful aren't you.
@hi:
Again, you're missing my point. First off, I never attacked an entire age group. I asked how THIS OP got to 70 without learning to budget. I didn't say "old people can't manage money", my comment was directed to THIS person. Further, my point was it's inappropriate for the commenters to launch personal attacks on each other. I'm not sure why you can't see why that's so.
First, isn't overdrafts a concern of everyone? So why the age-ism.
Second, banking is a service and if you cannot handle the fees for this service do not use it. She can simply cash her check anywhere as Federal Checks can be cashed at any bank without an account.
Third, no one, regardless of age, should use a debit card for purchases unless they have a line of credit established or have significantly more money in checking than the purchases. By significant I mean in excess of 1,000 after the purchase. With MC/Visa holds and bad math alot of people will overdraw their account on stupid purchases that they should have cash for. I once worked at a bank. People would overdraft their account buying coffee at 7-11. A DOLLAR FIFTY CUP OF COFFEE! While the bank should wave these fees for simple errors do not expect them to, especially if you are a habitual overdrafter. Just have common sense.
My checking account is overdraft protected by my savings account, which is nice. Of course, I had to bust my butt to save up the money to be self-insured against all but the most egregious overdrafts but I certainly wouldn't expect the average citizen to do the same.
@cmdrsass: see but you're saying this from a perspective where you're not 70 yet. where you've been educated about this. where you've got things like a 401k or something. and where you know social security isn't going to be available til you're 75.
that's what gets me about people saying "oh well shoulda planned, that's that." do you think an 80 year old woman on social security NOW honestly has the same financial knowledge or was brought up with that that you do at 20 or 30 or 40 or even 50?
the generation gap does count for something. my grandmothers worked all their lives, but their husbands pensions were what they both were retiring on. my grandmother worked 40 years for a city hospital and didn't get a pension. sure she got a retirement "package" but it wasn't anywhere near what my grampa got from the army and his engineering job after that. things just weren't done that way. they've even regressed to just taking away pensions from men.
to think that "sucks for you" is an appropriate response to things like this just makes me wonder what the hell is considered a decent human being any more.
Seriously.. is it that hard to understand? Get online checking... EVERYDAY check your balance. If you know how much you have, you will know what is important and not important to buy.... Mary wouldn't have a problem if she checked how much money she had in the first place...
@vgerik1234:
You have to be careful with logic like that. Expecting people to assume any personal responsibility is just provoking personal attacks on yourself.
I agree with katylostherart. The generation gap does account for a lot these days. I'm a college student now, and I still have to teach my parents how to properly use a blackberry, for example, even if I don't have one. Our financial knowledge wasn't the same in the 50s or 60s, when these older Americans would have been around my age. Plus, especially for women, many of these issues might have been taken care of by the male members of the households; yes, there may have been many women at that time who took care of their own finances, but there is a large possibility that the men watched over the money.
And overdraft isn't just a problem solely for older Americans: I've been hit with a big overdraft fee just a couple of months ago; my mother got really mad at me for that because I almost didn't have the funds to cover it. And it's not like I'm not paying attention, since I keep watch over my account as often as I can. But the thing is, particularly at the time the overdraft took place, I had other things to worry about...like MY HOMEWORK!! Yes, you can keep saying "to stop overdraft fees, stop overdrafting", but realistically, no one's going to remember the EXACT balance in their debit account. And you can say that "debit cards are bad, so don't accept a debit card from your bank", but for many of these seniors it's easier to carry a card than have to worry about keeping track of cash. Try figuring out which coin is what when your eyesight goes bad, or squinting at a $5 bill to make sure it's actually a $5, and not a $20.
Another problem with overdrafts is the various bank policies involved. I know this is a problem among college students: they get paid, and they deposit, then they go off and spend money via debit card thinking "Oh gosh! I have all this money now!", but they get hit with an overdraft the next day because of the bank's deposit policy. Many banks don't actually "deposit" one's check until the next business day, especially when you've actually deposited your check after a certain time (Wachovia, for example, won't add the new numbers to your account until the next business day if you've deposited after 3pm on a weekday or over the weekend). I've actually been hit with a (small) overdraft charge because I thought I had more money, when in "reality" I didn't. In these cases, it's not even the person's fault: it's the bank's fault for not advertising their own policies to increase awareness among their customers. THAT'S a big problem these days about overdraft.
Don't spend money you don't have. Problem solved.
So....why doesn't "Mary" have a credit card to begin with? Just because he bank won't give her one, I bet somebody will. Why doesn't "Mary" call her local utility company and explain to them the situation. "Mary" would be better off accepting a $5 late fee on her cable bill than continually overdrafting her account. There are so many options for those that live debt free. No eletric/power company will think any less of you for paying your bill a week or two late.