Report: Overdrafting Just A Little Or A Lot Has The Same Negative Consequences For Consumers’ Accounts

For most consumers, overdrawing their checking account results in a hefty fee. While it’s safe to argue that consumer who have more overdrafts will pay more in fees, a new report from The Pew Charitable Trusts finds that both high-frequency and low-frequency overdrafters often face the same devastating financial ramifications from banks’ overdraft penalties.

The analysis, called Overdraft Frequency and Payday Borrowing [PDF], takes a deeper look into the 2013 Pew Charitable Trusts survey data to compare the experiences of those who incur more than four debit card overdrafts a year – known as high-frequency overdrafters – and those who paid one to three overdraft penalties – known as low-frequency overdrafters – and their relation to the payday loan industry.

Pew Charitable Trusts found several slight differences between consumers who overdraft frequently and those who only do so a few times a year.

Pew Charitable Trusts found several slight differences between consumers who overdraft frequently and those who only do so a few times a year.

While high-frequency overdrafters were found to have paid an average of $95 in total fees for their last negative balance – nearly twice the $51 low-frequency overdrafters paid – both groups face similar issues when it comes to banking.

For example, the analysis found that one-quarter of low-frequency and one-third of high frequency overdrafters have had to close a checking account in response to overdraft fees.

Nearly 67% of low-frequency overdrafters and 59% of high frequency overdrafters incurred overdrafts with a transaction of $50 or less.

Additionally, nearly two-in-10 (19%) low-frequency overdrafters and three-in-10 (32%) high-frequency overdrafters paid an extended overdraft fee because they did not pay back the overdraft and the fee within the required number of days.

The report looks at the likelihood that payday loan borrowers will overdraft.

The report looks at the likelihood that payday loan borrowers will overdraft.

When it comes to a relationship with payday loans, Pew found that overdrafters are more likely to have taken out the small-dollar, high-interest loans.

In fact, the report found that consumers who take out payday loans are 144% more likely to overdraw their account than payday non-borrowers.

About 12% of low-frequency overdrafters and 9% of high-frequency overdrafters have taken out payday loans, compared to the 6% and 4%, respectively, of the general population.

While Pew researchers say they can’t determine a causal relationship between payday borrowing and overdraft, it is clear that the two products are often used by the same customers.

“Having a payday loan does not eliminate the risk of checking account overdraft and in fact is often the cause of an overdraft, so that borrowers end up paying for both the loan and the overdraft,” the report states.

The findings in the new analysis lead Pew to conclude that “rules that limit the harm of overdraft need to apply to all consumers and not just those who incur the most fees.”

The group goes on to urge the Consumer Financial Protection Bureau to write broad rules to ensure that checking accounts are safe and transparent products for all consumers by limiting overdraft fees and prohibiting bank practices that increase them.

Overdraft Frequency and Payday Borrowing [The Pew Charitable Trusts]

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