Overdraft Fees Up 35% In Past Two Years

As a nation, we pay more each year in overdraft fees than we do for books, cereal, or fresh vegetables, says the Center for Responsible Lending (CRL)—and considering how outrageously expensive cereal is, they must be talking about a huge sum. They are: “Banks and credit unions collected nearly $24 billion in overdraft fees last year, an increase of 35 percent from just two years earlier.”

As CRL’s new report (pdf) shows, in less than a decade overdraft fees have become the second largest profit center for financial institutions, almost equalling revenue from service fees. Last month, the New York Times noted that some banks and credit unions may not survive if the practice is reined in.

Here’s a summary of what CRL found in their study of overdraft fees:

  • Finding 1: Over 50 million Americans overdrew their checking account at least once over a 12-month period, with 27 million accountholders incurring five or more overdraft or non-sufficient funds (NSF) fees.
  • Finding 2: Banks and credit unions collected nearly $24 billion in overdraft fees in 2008.
  • Finding 3: Overdraft fee income for banks and credit unions rose 35 percent from 2006 to 2008.

How did this become so profitable to banks and credit unions? CRL says there are several factors. Financial institutions have continued to increase their fees for overdrafts, and have figured out ways to apply more fees to each account (for instance, by reordering the sequence in which debits are applied, or by not setting an upper limit on the number of overdraft fees per incident). And consumers have walked right into their trap by using debit cards and ATM machines with increasing frequency and for smaller amounts, which is how a bank or credit union prefers to catch customers.

It’s hard not to read the study without realizing just how abusive—and insanely profitable—overdraft fees are for financial institutions.

“Overdraft Explosion” (pdf) [Center for Responsible Lending]
(Photo: crazyBobcat)