Even with opt-in, overdraft fees still kill

How costly can it be - accidentally or on purpose - to use a checking-account overdraft as the equivalent of a short-term loan? The Consumer Federation of America has done the math for you, in a new survey of overdraft fees at 14 banks, and the results underscore how foolish such a decision or mistake can be.

Citizens Bank led the list for costliest overdraft loans, says the CFA, which has repeatedly shed light on risky "overdraft protection" schemes that do anything but protect. If you're a Citizens customer and write a $100 overdraft check, within two weeks you'll owe an additional $106.90 to the bank - a $37 overdraft fee, plus an extra $6.99 per day in "sustained overdraft" fees for the fourth through the 13th day. Represented as an annualized interest rate, or APR, that's the equivalent of a 2,779 percent loan. (Yes, that's a comma, not a decimal point.) One small saving grace: You'd save a little if it was your first mistake - Citizens' initial fee for that is $22.

Some other banks' fee structures were better, but still costly to anyone who uses overdraft protection to cover cash-flow shortfalls. The best of the bunch was Citibank, which charges a $34 for the initial infraction and no sustained-overdraft fees. But paying $34 for a two-week loan of $100 is still the equivalent of paying 884 percent, CFA says.

Of course, banks always insist that overdraft fees aren't loans, and they've won that point so far. Even though the Federal Reserve required banks to only provide this sort of overdraft coverage to customers who opt into it, it rejected consumer advocates' calls to impose Truth in Lending Act requirements on the programs, which would have made it easier for customers to compare overdraft fees against other high-cost short-term options, such as credit-card cash advances or payday loans. Either would likely be cheaper than many overdraft-fee structures. Ironically, all the banks also offer less-costly options to customers who ask for them, such as overdraft protection tied to a line of credit or savings account.

Despite the high fees, banks say they're getting significant numbers of customers to opt into the costly programs, which they continue to urge customers to elect.

One reason may be continuing confusion about the new rules. According to a survey by the Center for Responsible Lending that I wrote about (here) in April, 60 percent of respondents who opted into overdraft coverage said an important reason for doing so was to avoid fees if their card is declined. But under the new rules, a bank can't charge a fee for declining a debit-card purchase - or for authorizing a transaction despite insufficient funds - if a customer doesn't opt in.

The new CFA study shows some bright spots. Several of the 14 banks, including Wells Fargo and Citi, don't charge sustained-overdraft fees, giving customers a little extra leeway to get their finances in order. And some, including Wells, TD Bank and PNC, don't charge fees for an under-$5 overdraft - eliminating the notorious $38 cup of Starbucks coffee.

There are some other signs of progress from the study, which you can read here. One key change: Bank of America now asks for customers' consent at an ATM before authorizing an overdraft withdrawal, a technological innovation that other banks could adopt. Initially, Bank of America had simply stopped charging overdraft fees for both card point of sale transactions and ATM withdrawals. The study also says that HSBC has quit permitting overdrafts on debit-card purchases and ATM withdrawals, and that Citibank has never permitted them.

There has even been some progress on the order in which transactions are posted, which can prove very costly to people who make lots of small debit-card purchases that are posted after a more sizable overdrafts even if they occurred before. All the banks are quite willing to charge multiple overdraft fees per day - as few as three and as many as 10. (HSBC has no limit at all.) The CFA says says that since mid‐2010, several banks have changed the order in which payments are made from checking accounts, in some cases because of litigation:

In late July, Citibank started paying checks smallest to largest and will make that change for ACH transactions in October. Fifth Third Bank posts ATM and debit POS transactions in the order they happen before posting checks and ACH transactions largest to smallest. Wells Fargo processes ATM, debit card and other time‐stamped transactions in the order received or smallest to largest while paying checks and ACH transactions largest to smallest.

The bottom line? Overdraft fees still remain a big pitfall, especially for credit-stressed or inexperienced consumers who don't yet know the importance of paying scrupulous attention to their balances. If you don't pay attention before you run into these fees, you could be in for a very costly lesson. Opting out of the programs may cause a few hassles at the checkout line if your card is refused, but you'll be better off financially for it.