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Debit card overdraft fee APRs soar higher than 3,000 percent

by Broderick Perkins

(8/5/2011) ERATE Exclusive - Banks continue to rake in billions of dollars by charging customers exorbitant fees on small debit card overdrafts a year after the Federal Reserve required banks to get customers' permission to charge the fees.

That's largely because banks have used aggressive, cajoling and misleading tactics to get customers to sign up to be charged for the fees

The latest scathing report on banks' overdraft fee habit comes from the Consumer Federation of America (CFA) which says overdraft fees range from $33 to $37 for the typical $20 debit card overdraft, but some banks can charge as many as 10 overdraft fees in one day costing consumers as much as $370 a day.

The study, "2011 CFA Survey of Big Bank Overdraft Loan Fees and Terms" said the Annual Percentage Rate (APR) on a $100, two week overdraft can skyrocket to more than 3,000 percent.

Federal rules say banks must notify debit card holders of their right to opt-in to request overdraft fee protection. Debit cards are typically attached to checking or other accounts and are used instead of checks to make purchases and ATM withdrawals.

When cardholders do not opt-in to be charged the fees and attempt a transaction exceeding their debit card account balance and don't have another money account backing up their debit card account, the financial institution must deny the transaction without charge.

Denying charges against an account with insufficient funds was how banks conducted business decades ago, until they discovered the regulatory loophole of overdraft fees and began making what amounted to unsolicited loans that cost more than payday loans.

When federal rules sought to give consumers protection against the exorbitant fees, banks resorted to heavy marketing and scare tactics to keep consumers hooked.

CFA says "Notable exceptions are Citibank, which never charged overdraft fees for debit card and ATM transactions, and HSBC which no longer permits overdrafts by debit card at the cash register or ATM."

However, the CFA survey found two-thirds of the largest banks pile on more fees if consumers do not quickly cover overdrafts and fees. The result is a balloon payment loan.

"Banks extend credit when they pay overdrafts with the bank's money," stated Jean Ann Fox, director of financial services for CFA. "If the cost is computed as for a payday loan, banks are charging triple and quadruple-digit rates to borrow money when all the fees are added up."

Most banks also manipulate the order of processing payments to wrangle more fees from consumers.

"Regulators should prohibit banks from manipulating payment processing order to drive up overdraft fees and should require banks to offer consumers the lowest cost overdraft coverage for which they qualify. Banks should be prohibited from charging for overdrafts triggered by debit cards that can be denied at no cost to consumers," Fox said.

Consumers also need to cover their assets by not spending more than they have, backing up their debit card account with another account to avoid overdraft fees and judiciously using cheaper credit whenever possible.

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