Overdraft fees collected in 2019 by the 10 largest banks in America was $11 billion dollars. Not shocked yet? You are about to be. The average debit card transaction that triggered an overdraft fee was $20 according to the Center for Responsible Lending. Yes! You read that correctly, twenty dollars.
I have never been a fan of letting someone else count your money, so let’s look at why this activity is so dangerous. First, overdraft protection is a revenue generating product… period. Profits, not you, are being protected. Second, the $35 average overdraft fee is steep considering the bank has immediate access to the money it lends (a very low risk loan) after receiving your next deposit. Third, once you incur one overdraft fee, the likelihood of incurring multiple fees increases based on the number of transactions for which you do not have the money.
A $35 overdraft fee might not sound like much, but that’s because you are not listening. Hmmm! Let’s put this in perspective. Assume you have only a few dollars in your bank account and swipe your debit card for $20. Thanks to overdraft protection, the transaction clears but triggers a $35 fee. Is it me or does this seem similar to a sophisticated form of a payday loan? Don’t let the sexy words fool you.
I know what you are thinking… overdraft protection sounds like something that’s good for you. Who wouldn’t want to be protected from an overdraft? If you think of this as a payday loan, I bet you didn’t realize that the average overdraft loan repayment (remember, you borrowed $20 and paid $35 for the convenience) is only three days. Most payday lenders offer a 14-day repayment plan.
Using the APR (annual percentage rate) calculation from the Payday lending world, let’s shed some light on this math problem. Here’s how it works: Divide the amount of interest paid by the amount borrowed; multiply that number by 365; divide that number by the length of the repayment term; and multiply by 100.
$35/$20 = 1.75 X 365 = 638.75/3 = 212.92 x 100 = 21,291% APR
Please let my math not be correct. Overdraft protection is like payday lending on steroids.
Can you understand why banks love it when customers use overdraft protection? The truly sad part is that 9% of account holders pay 84% of all overdraft fees (approximately $9.24 billion). I understand that banks must earn a return when lending money, but something about this smells a little fishy to me. This is why I am a fan of opting out of overdraft protection. The true protection would come in the form of your card being declined when attempting to make a purchase without having enough money in your account. Protect yourself from yourself and opt out. A declined transaction might be embarrassing in the moment, but that is much better than being broke or minus broke for life.
