Young Adults Are Getting Hit with Enormous Overdraft Fees


By Leslie Parrish and Ginna Green, AlterNet
Posted on November 6, 2007, Printed on November 8, 2007

Few Americans are immune to the offers of quick, cheap and easy credit that surround us these days. Indeed, when brand-new adults first arrive on their college campuses, they are often greeted by a bank or credit card company before their resident advisor.

The consumer finance industry-including banks, credit unions and credit card companies-is never short of ways to lure in the American consumer, and a recent analysis performed by my organization, the Center for Responsible Lending, illustrates precisely how banks and credit unions are socking it to young adults — to the tune of nearly $1 billion a year.

More and more consumers — particularly young adults — are finding the deck stacked against them when it comes to battling abusive overdraft fees. Banks and credit unions now routinely allow most debit card transactions to go through when their account holders have a negative balance. Instead of declining the transaction, institutions will advance the funds to cover the shortfall (often less than $20) and charge the account holder an average fee of $34 for each overdraft. Consumers are not given an adequate chance to prevent these fees, which are largely out of proportion to the loans themselves. In fact, adults in general pay about $2 for every dollar the bank advances to cover debit card overdrafts, while young adults pay $3.25 for every dollar loaned to them, due in large part to their frequent use of debit cards for low dollar transactions.

In July, we found that banks and credit unions’ abusive overdraft lending practices cost American consumers $17.5 billion in fees for abusive overdraft loans. Our latest analysis, released last month, found that nearly $1 billion of that amount came at the expense of our nation’s college students and young adults aged 18-24.

And our nation’s young people-dubbed “Generation Plastic” because of their reliance on debit and credit cards-are particularly vulnerable to new banking practices that make it easier for even the most scrupulous account holder to avoid abusive overdraft fees [you mean make it harder for scrupulous account holders to avoidd overdraft fees?]. The rapid growth in overdraft fees levied by banks and credit unions-$17.5 billion in 2006 compared to $10.3 billion in 2004 -has been fueled largely by debit card transactions (popular among Generation Plastic) and bank practices that increase the number of overdrafts (popular at many banks and credit unions).

Some of those unsavory bank practices are related to daily account reconciliation. When banks reconcile a customer’s transactions for the day, they often deduct funds in order of the largest payment to the smallest, regardless of the order the transactions were made. The industry acknowledges this is their standard practice. By manipulating the order, the bank still covers the same number of payments, even when the account balance goes into the negative. But they can count more of them as overdrafts-and collect more fees in the process-if they deduct the largest debit first.

Other practices, such as enrolling customers in overdraft “protection” programs automatically without their consent or holding deposits for extended periods but processing checks and debits immediately, can lead to unexpected overdrafts for consumers as well.

There is a solution, however, and it’s pending before the U.S. House Financial Services Committee. HR 946, the Consumer Overdraft Protection Fair Practices Act, sponsored by Carolyn Maloney (D-NY) would require banks and credit unions to disclose the interest rates of these abusive overdraft loans so that consumers can compare the cost of this credit option to others. It would also empower account holders by allowing them to the choice to opt-in to an overdraft program, rather than automatically enrolling them without their express consent. It would also prohibit banks from manipulating the order they process checks and debits in order to increase fees.

The legislation is sorely needed for the sake of consumer protection. Even our most vulnerable and inexperienced consumer group-new, young bank customers-is not being shielded from abusive practices. Instead of protecting their financial wellbeing, these overdraft loans are robbing young people of a secure and solid start in their lives.

In the meantime, all consumers, but especially younger ones, should be wary of overdraft protection programs – especially those in which they were automatically enrolled or those that are not linked to a line of credit or to a savings account. Unfortunately, overdraft “protection” programs rarely consider the consumer’s best interests and typically protect nothing more than the bank’s bottom line.

Ginna Green and Leslie Parrish work with the Center for Responsible Lending. Parrish is the co-author, with Peter Smith, of Billion Dollar Deal, the Center’s recent report on overdraft fees and how they impact young adults.

© 2007 Independent Media Institute. All rights reserved.
View this story online at: http://www.alternet.org/story/66749/

2 Responses

  1. Tell me about it. Bank of America screwed me out of $120 for a single overdraft check. Citibank did the same to my house mate.

  2. Banks and overdraft fees. I found out the hard way. In my opinion the main reason that overdraft charges occur is the way that the banks computer processes charge transactions, when you use your ATM/debit card (visa or MasterCard) as a charge card. I’ll explain why.
    Let’s say you have 100 dollars in your account and you go to your local Mall and make a purchase for 40 dollars and use your ATM card as a debt card (charge card) against your checking for the transaction, well, you should have 60 left in your account, right? You would think so wouldn’t you? You start with 100 charge 40, 60 left right? The next day you go to the ATM to make a withdrawal it says you have 60 dollars available, right, ok you take out 50,you should have 10 left…. Right? 50 + 40 =90, you started with 100 – 90 = 10 left right?
    Wrong, you just triggered an overdraft when the transactions hit the bank computer that night, according to the banks computer, the 40 that you charged for the purchase the day before was a charge card transaction, even though they deducted the money from your available balance right away, there is still going to be a hold of 40 dollars against your account until the 40 charge transaction clears the banks computer which takes about 3 to 4 days and the hold drops off your account.
    So even though the ATM says you have 60 available, which is what you have left in your account, any withdrawal over 20 will trigger an overdraft charge, until that 40 dollar hold gets cleared and dropped from your account. Why? When the transaction hits the bank computer that night. It sees the 60 that you have, but, it also sees a 40 hold on the account for the charge transaction that hasn’t cleared yet, so effectively until that hold drops from you account the banks computer will automatically kick out an overdraft fee for any withdrawal above 20 dollars.
    That’s right folks when you use your ATM/debt card (visa card/MasterCard) as a charge card the bank is putting a hold for the amount of the charge against your account, even though they have already adjusted your balance for the amount of the transaction …That’s right, THEY HAVE A HOLD ON AN ALREADY ADJUSTED ACCOUNT BALANCE, AND THAT HOLD REMAINS UNTILL THE CHARGE TRANSACTION CLEARS AND THE HOLD DROPSOFF YOUR ACCOUNT.
    I don’t know if your banks computer is set up to figure transactions this way, but I know of 2 that do, I had an account with one of them for years and never had a problem with my account until I got their new ATM/debt MasterCard and started using it as a charge card. That’s when I started to have problems and overdraft charges. I finally figured out what was happening and brought it to their attention, about what was triggering the overdraft charges and got into a long heated discussion with them about it. I got the overdraft charges back, after going over line for line on their computer, and proved that I had the money in there, it was just the way that the computer interpreted the hold against the already adjusted account balance that was causing the problems, It was a very hectic undertaking because one mistaken overdraft charge on the banks part can start a chain reaction of overdraft charges. After everything was said and done, I had to change banks.
    So, to some this up, I’ll bet if you have had problems with overdraft charges and you can’t figure out why they’re happening, It’s because you used your ATM/Debit card as a charge card. Your first clue will be, when the bank official sits down with you to go over your account to try and explain the charges, if you hear them start talking about hold amounts against your account because of charge card transactions that haven’t cleared yet bend over because your being screwed.

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