Small purchases trigger big overdraft fees

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NEW YORK — Even the smallest debit card purchases are leading to big fees for customers who overdraw their bank accounts.

If you’ve opted in to overdraft protection at your bank or credit union, every time you make a purchase exceeding your account balance you’ll get hit with an overdraft fee and your financial institution will allow the transaction to go through.

But that coverage comes at a steep cost, a new report from the Consumer Financial Protection Bureau shows. The majority of purchases that trigger overdraft protection are for amounts of less than $24, while the fees average $34.

Because most consumers repay the money within three days, that fee translates to an annual percentage rate of 17,000%, according to the CFPB. Unsurprisingly, the costs can really add up — especially for the one in five people with overdraft protection who overdraw their account more than ten times per year.

While the CFPB is conducting more research on the topic, it says it’s concerned that people are incurring such large costs for a short-term advances like this. The agency said it’s looking into ways banks can make the process of opting in clearer for consumers or introduce policies that would help customers avoid these fees.

Several banks have already made such changes to their overdraft programs: some no longer charge fees if the overdraft triggering the transaction is small, like $5. Others put a limit on the number of overdraft fees a customer can be charged per day.

Bank of America is even rolling out a special checking account for chronic overdrafters, where customers are stopped from making purchases that exceed their balance instead of being charged an overdraft fee.

But because overdraft fees mean big money for banks — accounting for more than half of fee income from checking accounts — many banks’ policies are still troubling, the CFPB found. One tactic some banks use is to order transactions from biggest-to-smallest to maximize the number of overdraft fees charged, rather than processing the transactions in the order they were actually made.

“Consumers who opt in to overdraft coverage put themselves at serious risk when they use their debit card,” said CFPB Director Richard Cordray. “Overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error.”