Overdraft fees hit poor Americans hardest

Years ago, I had less than $5 in my checking account with a day or two to go before payday. An automatic debit from a subscription I hadn’t canceled in time tried to pull $15 from my account, and the bank’s monthly maintenance fee also hit at the same time. The simultaneous transactions — including a repeat attempt to process the (initially declined) subscription fee the next day — led to a cumulative total of more than $125 in overdraft fees.

It’s a domino effect that can create an impossible dilemma for those living paycheck to paycheck. In a time when I was barely keeping my head above water financially, I had to decide which essential bill I wouldn’t pay in order to cover the negative deficit.

Fortunately, this dilemma may soon be a thing of the past for tens of millions of Americans. Earlier this year, the federal agency responsible for protecting American consumers from unfair or deceptive financial practices proposed a rule change that could help lessen the blow of overdraft fees — which could make a big difference for low-income bank customers.

Currently, a single overdraft fee is often $35 or more, even though the majority of debit card overdrafts are for less than $26. The new rule proposed by the Consumer Financial Protection Bureau (CFPB) could drop that amount to as little as $3 at the nation’s largest banks. If enacted, this change could save Americans more than $3.5 billion a year in fees.

As someone who has lived in poverty and paid a significant amount in overdraft fees over the years, I would welcome this change. I know what a big difference it would make for many low-income and working-class people.

Evidence shows these fees have the hardest impact on those who can least afford it. According to data from the CFPB, more than one-third of all households with an income of less than $65,000 were charged at least one overdraft fee in the past year. And this issue is widespread: 17% of households with checking accounts reported an overdraft or insufficient funds fee in 2022, according to a survey conducted by the Financial Health Network. Almost half of the respondents said their most recent overdraft occurrence was triggered by a transaction of $50 or less.

I have been speaking out about this issue for years, and for most of that time, I have watched as these fees escalate. Overdraft fees disproportionately affect the poor, and the fallout created by even a single overdraft can have a huge impact on someone who is struggling to make ends meet.

In a common scenario, one initial overdraft fee sets off a costly and distressing chain of events in which transactions or attempted transactions ricochet back and forth, zipping in and out of your account and triggering an additional charge each step along the way. Meanwhile, if you don’t have the money to bring the account into the positive, you can only watch helplessly as your balance continues to plummet further into the negative.

Part of the problem is the seemingly unfair and often confusing way banks process transactions or credit incoming deposits, which is especially important when you’re just barely staying in the positive while attempting to juggle transactions that might cross paths around the same time.

Although some banks have reduced or eliminated overdraft fees in the past few years, these fees are still a big source of revenue. The CFPB estimates consumers pay roughly $9 billion in overdraft fees per year.

This focus on overdraft fees is the latest move in an ongoing push by the Biden administration to combat “junk fees” — a broad range of often mysterious charges with names like “resort fees” or “convenience charges” that often cause the actual price of a transaction or purchase to skyrocket.

“Banks call it a service — I call it exploitation,” the president said in a statement released by the White House.

I’d love to see other changes. Perhaps banks could waive one or two overdraft fees a year as a courtesy to longtime customers. But this drop in overdraft fees would make a huge difference to those for whom a small miscalculation could spell financial disaster.

Bobbi Dempsey is a freelance writer whose credits include Harper’s, the New York Times, the Washington Post, and others. Her work is supported by the Economic Hardship Reporting Project, where she is a reporting fellow.