Overdraft Fees Affect Student Finances
From: "Overdraft Fees Affect Student Finances", Kansan.com, The University Daily Kansan, 12/10/09
Matthew Visser, Fort Hood, Texas, freshman, uses an ATM at the Kansas Union. In 2008, almost half of young adults overdrew on their accounts, paying more than $1 billion in fees.
The lessons of money management came one overdraft at a time for Celie Wall. As a college freshman, Wall repeatedly spent money she didn’t have in her checking account. Unaware of the consequences, she racked up hundreds of dollars in overdraft charges.
Many students struggle with overdraft fees. View this interactive graphic to learn more about overdraft protection.
Wall, Greensboro, N.C., senior, overdrew her debit account on more than 10 separate occasions during her first semester, eventually paying more than $300 in fees.
“I pretty much thought it was like a gift card,” Wall said. “My parents had always watched over my finances. I was really dumb about it.”
But Wall’s freshman-year ignorance is common among young adults. Each year nearly half of adults ages 18 to 24 overdraw their checking accounts at least once. At an average cost of $26 per overdraft, young adults paid more than $1 billion in overdraft fees last year, according to studies by Moebs Services and the Center for Responsible Lending.
Checking account holders say overdraft practices and policies are predatory and unfair. The government has begun responding to these calls with new Federal Reserve regulations, and legislation in Congress might put strict restrictions on the fees that could all but eliminate them. Experts warn that although the regulations would alleviate the pain of overdraft charges, banks could impose new policies that would continue to cost consumers.
What is an overdraft?
Because 46 percent of young adults overdrew their checking accounts last year, it’s not hard to find students with experiences similar to Wall’s.
Bryant Hadley, Wichita sophomore, overdrew on his Bank of America checking account after purchasing textbooks earlier this year. In less than two days, he overdrew five times, incurring nearly $180 in fees.
Two McDonalds double cheeseburgers cost nearly $40 with a fee attached.
“I’d have preferred a nice steak dinner with that kind of money,” Hadley said. “I just didn’t know my account had tanked.”
A checking overdraft occurs when people withdraws more money than they have in their checking accounts. Whether through a written check, a debit card transaction or an ATM withdrawal, most banks allow account holders to borrow money when funds run out. The bank fronts the money and charges a fee for the service.
“If you’re in the line at the grocery store and you don’t have enough money in your account, this protection allows you to make the transaction,” said Don Vecchiarello, a spokesperson for Bank of America.
But this protection is often neither free nor optional.
Although the national average overdraft charge is $26, the average for the nation’s “Wall Street” banks, those with assets greater than $50 billion, is closer to $36, according to Moebs Services, an Illinois-based economic research firm. Founder Mike Moebs said national banking chains have pushed the fees up during the past two decades to nearly $10 higher than credit unions and community banks.
The fees are an important revenue generator for banks. In 2008, overdraft services pulled in $36.7 billion for American banks, up from $16.5 billion just 10 years earlier.
Checking account holders across the country are calling for new governmental regulations to protect them from what they see as unfair and predatory policies.
Erin Williams, Wichita junior, first experienced the pains of overdraft fees while using ATMs during a winter break trip to Colorado last year. On her vacation, she unknowingly made five overdrafts, costing her nearly $200 in fees.
Williams argued that her five-pack of overdrafts were the result of confusing ATM methods. She expected the ATM to warn her if she was taking out more than available. She was also confused by her ATM statement.
Williams said the statement had a negative sign to the right of her dollar amount, which she ignored.
“I’d get my balance and it would portray it as a positive number,” Williams said. “So I thought I’d have money in my account and make a withdraw, only to put myself way further in the negative.”
Her complaints are among thousands calling out for overdraft regulation. The complaints cover deceptive practices and both a lack of choices and information. Calls for overdraft regulations are being heard in federal courts, agencies, and both houses of Congress.
But many complaints center on a general lack of knowledge by account holders.
Scott Reid, Abilene, Texas, senior, was surprised when he discovered he owed $150 in overdraft fees to Commerce Bank. He was aware he could be charged for an overdraft, but he did not understand there would be no notification when his account hit zero.
“I just figured that my card would be rejected or I would be warned somehow,” Reid said. “It was never really explained to me.”
Despite angry customer allegations, both banks and financial experts contend that there are sound principles for the system that is in place.
Don Vecchiarello emphasized the word “protection” in the Bank of America’s overdraft protection policies. He said the majority of customers who understand the value of protection appreciate having it. Protection allows for account holders to avoid the embarrassment of being denied in a checkout line.
“I think the majority of customers who understand the policies appreciate the service,” Vecchiarello said.
Robert DeYoung, KU professor of business, said when people complain about the current overdraft protection system, they fail to consider a world without it.
For example, when students use their debit cards on vending machines, the computer does not check their actual account to make sure funds are available. Instead, it takes a guarantee from their bank that the transaction will be fulfilled.
In a world without overdraft protection, this guarantee might not exist.
“Too many people probably take for granted what this service actually allows,” DeYoung said.
Vecchiarello said that Bank of America had heard the calls for change and was working to heighten its focus on meeting customer needs.
In late October, Bank of America eliminated overdraft fees for withdrawals of less than $10 per day. The bank also no longer charges additional fees when a customer has more than four overdrafts in a day.
“We recognize that many of our customers are experiencing challenges with the current economy, and we’re committed to finding more ways for them to manage their finances,” Vecchiarello said.
If Erin Williams attempts to overdraw on her bank account six months from now, she might be faced with a new bothersome reality — rejection.
Recent regulations set by the Federal Reserve require banks to provide more information and options concerning overdraft protection.
On Nov. 12, the Federal Reserve ruled that banks would no longer be able to automatically enroll their customers in overdraft protection programs. Instead, customers will receive clear information about their options for overdraft protection and can choose whether they want to opt-in. Banks must also send existing account holders notifications asking them if they want to opt-in to an overdraft program. If they do not respond by July 1, they will be taken off the overdraft plan.
Also, bills in both houses of Congress propose setting strict limits on the number of overdraft fees, their prices and the structure of their collection.
The bills, both titled the Overdraft Protection Act, would limit banks to charging a customer for only one overdraft per month, and a maximum of six per year. The bills would also ensure that overdraft fees are set proportionally to the amount of an individual overdraft.
Lesley Parish of the Center for Responsible Lending said the bills would provide permanent necessary changes for checking account policies.
“Once the spotlight fades on these issues banks will go back to their egregious practices,” Parish said. “We’re hopeful that the current momentum will make sure these bills are supported.”
What could this all mean?
Scott Reid keeps small amounts of money in his Commerce Bank checking account. He puts in his bi-weekly paycheck from his part-time landscaping job. He uses the small amount of money to pay for food, entertainment and other expenses. His second banking account is with his hometown bank in Texas. He uses that account to pay rent, utility bills, loans and other big payments.
The system has only failed once, when he overdrew five times in less than three days from his Commerce account.
But in the future, Reid might face more fees for simply having a checking account.
“If you get rid of overdrafts, banks are going to charge the same people in new ways,” DeYoung said. “Getting rid of overdraft fees will spread out the costs more among account holders, especially those with small balances.”
If the proposed overdraft legislation is passed by Congress, checking account holders will likely be subjected to new and increased monthly “maintenance” fees that will make up for revenue collected by overdraft fees.
Experts say strict regulations could be detrimental for both banks and consumers for years to come.
Because overdraft fees are expected to generate $38 billion in bank income this year, substantial limits could mean billions in lost revenue.
Some figures suggest that banks are already adapting to potential changes. Checking account monthly maintenance fees increased by 15 percent in the first and third quarter of 2009, according to Money-Rates.com, a Web site that compiles banking statistics. These fees include monthly charges for direct deposits and minimum balance fees.
Professor DeYoung said account holders such as Reid are unprofitable for banks unless they charge fees because the amount of money kept with the banks is too small to lend out. He said people who have problems with overdrafts should remember that banks are a business like any other.
“We don’t complain when movie stores charge us late fees because we recognize the service they are providing,” DeYoung said. “But with banks, people forget about the service they are providing. And this service isn’t free.”
Mike Moebs added that the restriction of overdraft fee collection could be a frustrating dilemma. If customers opt-out, then hit their limit, or have banks that simply decide to stop allowing overdrafts, transactions will be rejected and banks will either suspend or shut down customer accounts.
DeYoung added that the ability to make purchases with debit cards and checks might become far less universal than it is now. Most small transactions today occur without the business actually transacting with the account. For example, if a person swipes his or her debit card at McDonald’s, the transaction is allowed because the bank guarantees the transaction. After the point of sale, the bank makes the full charge from the account later in the day.
If banks are no longer profiting from people who go into the red zone, they might discontinue this service.
“Those card swipes on vending machines might disappear,” DeYoung said. “Banks will stop wanting to allow a risk where people can spend more money than they have.”
What should students do?
After her first semester freshman year, Celie Wall’s parents brought her to their local bank in Greensboro, N.C., and sat her down with the manager. Her parents had closed down her accounts.
“They basically sent me to a bank and had me sit down with them,” Wall said. “What was supposed to be a 30-minute conversation ended up being a three-hour meeting about money management.”
She has not overdrawn from her account since.
Now she has three accounts: one for spending on “fun things,” another for paying rent and bills, and a savings account. To keep track of her finances, she uses a check registry and a phone application that allows her to record payments and keep track of her balances at all times.
Today, Wall’s skills are ahead of the curve. Moebs said that seven out of eight people who have checking accounts do not balance them. He said recent technology such as online statements were helping people, but most were unaware of how much money they had in their accounts.
Most students live on tight budgets, often with small, paycheck-to-paycheck accounts like Reid’s.
DeYoung said whatever happens with overdraft regulations, the best advice he could give for students is simple.
“Keep track of your money,” DeYoung said. “If you don’t, you can expect to get screwed, no matter what the laws are.”
Written By: rnybeck
Date Posted: 3/3/2010
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