Did Your Bank Mention That Overdraft Protection Could Cost You $450/Year?

A customer uses a Bank of America ATM near the company's headquarters in Charlotte, N.C., Tuesday, July 7, 2015.
A customer uses a Bank of America ATM near the company's headquarters in Charlotte, N.C., Tuesday, July 7, 2015. Chuck Burton/AP Photo

Let’s say you’re in the checkout line at the grocery store picking up a few items for the week. Your total comes to $25, but you only have $10 in your checking account.

It might feel a little embarrassing to put some items back or insert your card and have the store decline it. That’s the moment when overdraft protection can lend a helping hand.

According to the Consumer Financial Protection Bureau, while that protection could save you a little embarrassment, it costs you big bucks. On average, people who overdraft their accounts often — more than 10 times each year — waste an extra $450 every year in bank fees when they sign up for overdraft protection in comparison to overdrafters who don’t.

And those people likely can’t afford it.

A recent CFPB study found that “most of these frequent overdrafters are financially vulnerable, with lower daily balances and credit scores than people who do not overdraft as often.”

Now the CFPB wants banks to make it clearer just how much in fees you could owe if you use overdraft protection.

CFPB Wants You to Know Before You Owe

The CFPB created four prototype forms banks could use to replace their current fee disclosure forms. The new CFPB forms highlight the fees, and make it clearer to consumers when they will incur fees and how much those fees will cost.

The CFPB’s forms include the calculation from the grocery store example above.

In the example, the CFPB lays out two options. If you opt out of overdraft protection, the store will decline your card, and you won’t incur any fees. Your pride might be slightly bruised, but you will still have the $10 you started with.

For those who choose overdraft protection, the form lays out what will happen next. The $25 charge will be approved at the register. This will drain the $10 you had in the bank and put you in the hole to cover the $15 balance of your purchase, plus a $34 overdraft fee.

That means you get to take your groceries home now, but you will owe $49 to your bank.

And if you don’t realize you’re overdrawn right away, your card could get approved up to six times in a day before it is declined. That would mean $204 in fees plus the cost of the items you bought.

Finally, the example also makes it clear that if you can’t pay the balance in full within five days, the bank will charge you $5 every five business days until you pay it off.

“Our study shows that financially vulnerable consumers who opt in to overdraft risk incurring a rash of fees when using their debit card or an ATM,” said CFPB Director Richard Cordray in a statement. “Our new Know Before You Owe overdraft disclosure prototypes are designed to help consumers better understand the consequences of the opt-in decision.”

While the CFPB isn’t overtly telling people to opt out of this protection, it does want you to know what you’re getting into if you use it.

Protect Yourself From Overdraft Protection

Currently, 18% of the banking population pays 91% of the overdraft fees to banks every year, helping them rake in an extra $11 billion in fees. But you don’t have to be one of those people.

We’ve got some ways you can protect yourself and keep your budget intact.

First, opt out of overdraft protection, and turn off your automatic bill pay feature. It might be a bit embarrassing to get your card declined unexpectedly, but it’s better than the financial pain of paying outrageous fees that can add up quickly.

Paying your bills manually also gives you control over when they come out of your bank account.

From there, start an emergency fund. Putting away just $10 each week will give you $520 over the course of a year. You can dip into this fund when unexpected expenses come up.

Finally, use online banking apps and text notifications so you always know your balance.

Signing up to get a daily text alert from your bank will ensure you always know exactly how much money you have. You can also set limits and receive notifications when your bank balance drops below a certain threshold or check your balance throughout the day using your bank’s app.

This will ensure a low balance never surprises you and a store never declines your card for insufficient funds if you opt out of overdraft protection.

Desiree Stennett (@desi_stennett) is a staff writer at The Penny Hoarder.

Do you think this article might help you put more money in your pocket?