Banks offer advice on avoiding overdrafts

College students incur bank overdraft fees more than any other age group.

By Eva Dou

Published Feb. 5, 2009

MU senior Alec Dorste bought dinner with his debit card a couple months ago and overdrew his account by 53 cents.

After two more purchases totaling about $10, he had $120 in overdraft charges.

"Usually they cancel the first fee if you ask, but I had already canceled one earlier so I ended up having to pay the $120," he said.

Consumer advocates say bank overdraft fees are surprise loans, some with four-digit interest rates. Banks say they are an optional service, sparing customers the embarrassment of being turned away at the register.

To many students, overdraft fees are an expensive lesson.

Slip-ups like Dorste's amount to $1 billion in overdraft charges for young adults in the 18-24 age range, according to the Center for Responsible Lending.

The FDIC says young adults incur these fees more often than any other age group. Almost half of the surveyed young adults had at least one overdraft, with 15 percent racking up 10 overdrafts or more.

Students may be more prone to overdraft since they tend to have low balances and less experience in managing their money, MU finance professor John Howe said.

In recent years, overdraft fees have been creeping higher, and so has the prevalence of the "courtesy overdraft," in which a bank covers an overdraft and charges a fee, without the customer signing up for a program.

Also controversial is the practice of honoring charges from highest to lowest regardless of when they were made, a system used by about a third of Missouri banks. These banks reason larger charges are more important ones, like mortgage payments, so they pay them first. But this system can also mean multiple overdraft charges.

Opinions differ on the banks' overdraft practices.

Harold Bradley, chief investment officer of the Kansas City-based Kauffman Foundation, said reform is overdue.

"The banks are abusive," Bradley said, who blogs about financial matters for The Kansas City Star. "Personally, I think it's because they don't want people to use debit cards. They are trying to create a nation of credit addicts."

Incidentally, Bradley's college-age son, like Dorste, was also hit this year with $120 in overdraft fees for three small debit card charges. For his son's $600 balance, Bradley said this equated to 20 percent in fees.

"This is an amazing and usurious rate," he said.

Free market supporters say banks, like other businesses, should be able to set their own price.

"The way I look at it, overdraft protection is a service, one you can opt out of if you want," Howe said, who holds the Missouri Bankers Chair at MU. "Generally, in the American system of capitalism, we don't regulate prices, though I'm not denying these can get onerous."

The Missouri House of Representatives apparently agreed in 2003 when it lifted the state's $15 cap on overdraft fees. Legislators believed the influx of competition in the state's banking industry would keep prices in control, said Bill Ratliff, executive vice president of the Missouri Bankers Association.

"For years, the average was $7.50, but (when the cap was established) almost overnight everyone went to $15," Ratliff said. "We said, wait a moment, maybe it would be better to just let the marketplace handle it."

The state average has risen to $20 or $25 since. Ratliff said the markets are still in control since dissatisfied customers can always take their business elsewhere. In Missouri, there are 346 different banks offering overdraft fees ranging from $7.50 to $35.

About 70 percent of these banks offer a form of overdraft protection, such as linking the checking account to a credit card or savings account. These programs generally result in lower overdraft charges.

'There needs to be more transparency'

Bradley said a lack of transparency is a problem with the banks. He said he looked on several national banks' Web sites and failed to find any information on overdraft rates.

Freshman Thomas Leonard agreed.

Leonard said he overdrew his account in October when he bought a drink at Kaldi's Coffee Shop downtown. When he realized he was in the red, he called Commerce Bank, who was helpful and froze his charges. However, he said he's irked they didn't inform him about the cost of overdraft at the outset.

"It was definitely my mistake, and they handled it fairly afterwards, but there needs to be more transparency," he said.

Valerie Shaw, Commerce Bank executive vice president of retail banking for Central Missouri, said she believes the bank is effective in informing customers about the fees.

"We are very student-friendly," she said. "We encourage the students to come in and ask questions. We offer free financial check-ups and try to offer a variety of solutions."

Ratliff agreed that he thinks information is out in the open.

"There's plenty of disclosure right now," he said.

'Keep your checkbook balanced'

The overdraft issue has long gained the notice of legislators. For the last three sessions of Congress, U.S. Rep. Carolyn Maloney, D-N.Y., has proposed an overdraft fee regulation bill.

The Consumer Overdraft Protection Fair Practices Act would require customers to be notified at the register or ATM when a transaction was about to trigger an overdraft. The act would also require disclosure of all the charges of an overdraft program and would let customers opt in or out.

The bill never left committee in previous years, but Maloney announced on her Web site she plans to reintroduce it this year.

Bank of America spokesman Jim Pierpoint said a point-of-sale notification program, like the one Maloney proposed, would not be effective for customers since the bank only updates accounts at night. If several transactions were made during the day, only the customer can know the exact balance of the account, he said.

"We don't know until that night whether you've made a deposit," Pierpoint said. "We're not going to settle out your account until that night."

Despite the differing opinions, there is one point of consensus: The best scenario is to avoid an overdraft altogether. This is easier than ever, now that many banks offer free online or mobile alerts when an account runs low.

"This is one fee that is completely avoidable," Ratliff said. "Watch your checkbook. Keep your checkbook balanced."