A $5 cap on fees for overdrawing your bank account balance is likely to be among the latest consumer protections from Joseph R. Biden Jr.’s presidency to fall.
Congress voted last week to strike down the $5 cap on most overdraft fees approved by the Consumer Financial Protection Bureau late last year. President Trump is expected to sign the change into law, though the timing is uncertain.
The change means that the biggest banks and credit unions will be able to continue charging hefty fees — often ranging from $15 to as much as $35 — for covering shortfalls when you write a check or use your A.T.M. card for more money than is in your checking account. Households that pay overdraft fees would have saved an average of $225 a year under the proposed rule, the consumer bureau said when it enacted the rule.
Households that struggle to pay bills, save for emergencies and manage debt are more likely to pay overdraft fees, the Financial Health Network, a nonprofit focused on financial stability, has found. Such households are disproportionately Black and Latino, and most make $30,000 a year or less. For this group, which may lack options for affordable credit, overdraft fees compound financial challenges and “can have a considerable negative impact,” the network reported in 2023.
“People with low incomes really bear the brunt of this,” said Nadine Chabrier, senior policy and litigation counsel at the Center for Responsible Lending.
Consumers also won’t see lower fees when they pay their credit card bills late. This week, the Trump administration scrapped an $8 limit on most card late fees, which hover around $32.
According to the Pew Charitable Trusts, overdraft fees are unpopular, with 70 percent of Americans deeming a $35 overdraft fee to be “unfair.” Most people would prefer to have banks simply decline transactions if they lacked funds in their account, Pew found, and 84 percent want the government to encourage banks to lower the fees.
Banks, however, argue that 70 percent of bank customers find their bank’s overdraft service “valuable.” Consumers “have indicated time and time again that they value and appreciate” the service, Rob Nichols, chief executive of the American Bankers Association, said in a statement after Congress struck down the cap.
What exactly is an overdraft?
An overdraft occurs when your checking account balance is too low to cover a purchase or withdrawal, but the bank covers the amount and, typically, charges you a fee. Overdraft fees began as a “courtesy” in the late 1960s to help bank customers avoid bounced checks, according to Pew. As debit cards gained popularity, the fees became a significant source of revenue for banks — an estimated $12 billion in 2024, according to an analysis by the Financial Health Network.
Does this mean banks will charge higher overdraft fees now?
Not necessarily. The fee cap was not scheduled to take effect until October. So for now, at least, little has changed, said Jennifer Tescher, the Financial Health Network’s chief executive.
Scrutiny by the consumer bureau, along with competition from digital money tools, had led some big banks to eliminate or reduce overdraft fees in recent years, or to give customers more wiggle room to bring account balances out of the red before charging them.
“I don’t expect banks to all of a sudden renege on positive changes they have made to overdraft policies,” Ms. Tescher said.
Which banks have eliminated or reduced overdraft fees?
It can pay to shop around to find banks with no or low overdraft fees, said Adam Rust, director of financial services with the Consumer Federation of America, although consumers must weigh the size of overdraft fees with other account fees that banks may charge.
Some big banks have done away with the overdraft fees, although the details of how they handle overdrawn accounts vary. Some, for instance, may set limits — like $250 — on the size of the overdraft they will cover.
Capital One eliminated overdraft fees in 2022. Its customers are not charged a fee if they overdraw their account and the bank covers the shortage, according to the bank’s website. But if the shortage isn’t covered “promptly,” the bank may decline to cover further overdrafts and may close your account.
Other banks that did away with the fees include Ally Bank and Citibank.
Banks that have reduced their overdraft fees include Bank of America ($10), KeyBank ($20) and Huntington Bank ($15).
How can I avoid overdraft fees?
If your bank account does charge overdraft fees, make sure you understand your bank’s policies and that the bank knows your preferences. At most banks, overdraft coverage means that the bank, for a fee, generally pays shortages caused by checks, automatic bill payments and recurring debit card transactions, like membership fees. But you must choose, or “opt in,” to have optional coverage for shortages resulting from everyday debit card spending and A.T.M. withdrawals.
If you don’t elect coverage of debit and A.T.M. withdrawals and you overdraw your account, the transactions will simply be declined. (There’s often no bank fee charged in those circumstances since many banks have done away with what were known as NSF or non-sufficient funds fees.)
“Make sure you are opted out for debit card transactions,” said Lauren Saunders, associate director of the National Consumer Law Center, if you don’t want to risk overdraft fees for everyday spending.
If you do want overdraft coverage as a backup, opt in. But be prepared to pay fees if you overdraw your account.
Either way, it’s smart to set up low-balance alerts, via text or email, to warn you if your account falls below a certain limit.
Most banks offer the option to link your checking account to another account — a savings account, say — at the bank. If your checking account balance goes negative, funds are automatically transferred into your checking account to cover the shortage, often with no fee or, at least, a lower fee than one you would pay for an overdraft.
That may mean keeping some funds in a savings account that earns a low rate of interest, Mr. Rust said. Many people now stash free cash in high-yield savings accounts at online banks, which tend to pay higher rates. But, he said, the overdraft transfer option generally isn’t offered for accounts at outside institutions.
Many banks and credit unions offer low-cost bank accounts with no overdraft fees through partnerships with Bank On, a nonprofit-run program that works with banks nationally to certify safe, low-cost accounts. You can ask a bank if it offers Bank On accounts, or search on the program’s website.
Thomas Rudzewick, chief executive of Maspeth Federal Savings in New York, suggested that consumers consider smaller institutions like his, which have no-fee accounts and are willing to work with customers to improve their budgeting skills if they run into problems overdrawing their accounts.
Are there alternatives to using overdraft services?
More banks are offering short-term installment loans or lines of credit, which can help people get through a cash crunch. The loans can be quickly approved, based on the account holder’s track record at the bank. Payments can be spread over several months, and rates are lower than for high-interest “payday” loans.
US Bank’s “Simple Loan” offering, for instance, lets customers apply while logged in to their checking account to get a “real-time” decision on borrowing $100 to $1,000. Funds are deposited directly into their accounts, at a cost of $6 for every $100 — roughly a 36 percent annual percentage rate. That means a loan of $400 has a fee of $24, according to the bank’s website. (By comparison, traditional, payday loans can have triple-digit interest rates.)
Other banks offering similar “small-dollar” loans include Bank of America, Huntington Bank, Regions Bank, Truist and Wells Fargo.
What about digital financial tools?
Some financial technology firms or “neobanks” promote banking services with no overdraft fees, but there’s reason to be cautious about using such apps. While the firms team up with banks to hold deposits, they are not banks themselves, and your money may be vulnerable when it’s in transit, as The New York Times has reported. The Federal Deposit Insurance Corporation recommends that if an app claims to offer federally insured deposits, “you should identify which specific F.D.I.C.-insured bank or banks” will hold your money and confirm the bank is insured by searching in the agency’s BankFind tool.
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