Want to pay an interest rate of 17,000% on a financial transaction? Just pay a bank checking account overdraft fee of $35 on a $24 transaction, and that's exactly what you'll pay on the overdraft fee's interest rate, according to a calculation from the U.S. Consumer Financial Protection Bureau.
"We found that the majority of debit card overdraft fees are incurred on transactions of $24 or less and that the majority of overdrafts are repaid within three days," the CFPB states. "Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000% annual percentage rate."
Who would willingly and knowingly sign up for such a financial shellacking? Actually, plenty of people do.
Experts call them the "heavy overdrafters" - those financial consumers who generate more than $100 in overdraft fees over a one-year period.
According to the Pew Charitable Trust's recently-released fact sheet "Heavy Overdrafters: A Financial Profile", about one-fifth of all banking consumers represent the "heavy overdrafter" consumer segment - and there's a reason why they're the worst offenders.
This from Pew: "A small proportion (18%) of account holders pay the vast majority (91%) of all overdraft fees triggered by debit cards, checks, and automated clearinghouse (ACH) electronic transactions. These customers paid more than three overdraft fees a year."
"For these consumers, overdraft service is not just an occasional courtesy but an extremely expensive form of credit that is also high risk, because it lacks the consumer protections that accompany other credit products," Pew reports. Who are these serial overdrafters? Pew has a take on that, as well.
- Fees consumed nearly a full week's worth of heavy overdrafters' household incomes on average during the past year.
- Half of heavy overdrafters incur six or more overdraft fees annually, and 42% paid seven or more.
- More than 40% of heavy overdrafters paid more than $300 in overdraft fees in the past year.
- Most heavy overdrafters are Millennials and Generation X-ers.
- Heavy overdrafters generally have below-average incomes relative to the U.S. population.
- More than half of heavy overdrafters are renters rather than homeowners.
"Typically overdrafters suffer from behavioral issues versus financial issues," notes Jason Hamilton, president of KIS Fee-Only Financial Planning, in Orange County, Calif. "They don't set a spending plan and stick to it. They make choices in the moment and have a hard time planning for the future."
To avoid becoming that serial bank overdrafter, take a sharper focus of your everyday spending habits, and cut out the impulsive behavior that leads to huge overdraft fees.
"Slash unnecessary spending and save the money for a rainy day," advises James Capolongo, head of retail deposits at TD Bank. "Also, look for ways to pay yourself first. Do you buy coffee each morning, lunch most days, or eat out for dinner multiple times per week? Figure out how much you are spending each week and replace some of those excursions with a couple of bag lunches or home cooked meals."
Then, take the money you save and add it to your savings account. "When an unexpected expense comes up, you can use these savings rather than over drafting your account," Capolongo says. "And when shopping, dining out, or going on vacation, make sure you stay within your budget by using a reloadable prepaid card. This ensures you only spend what you've allotted."
Another good tip - remove the possibility of overdrafting altogether. "Many banks offer overdraft protection, which links your checking account to your savings or money market account or line of credit," Capolongo adds. "If your checking account becomes overdrawn, and you have sufficient funds available in your other accounts, the funds will be automatically transferred to your checking account."
Knowing what's coming down the pipeline, income-wise, helps, too. "If you often find that your bills are due before your bi-weekly paycheck, then you know you're going to run into overdraft fees," says Ram Palaniappan, CEO of Activehours, an on-demand payroll firm that provides workers instance access to paychecks. "You'll need a system to manage cash flow timing issues like putting away a part of each paycheck towards bills or synchronizing your income with your expense."
No question, serial bank overdraft leads directly to serious debt. Nip it in the bud by controlling spending, being fully aware of what's available in your checking account and opting for overdraft protection. That will reduce, or more likely even eliminate, the dreaded prospect of becoming a heavy overdrafter.