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I bought my kids dinner -- and saw firsthand how overdraft fees punish the poor
Perspective: I bought my kids dinner — and saw firsthand how overdraft fees punish the poor
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Outlook • Perspective
I bought my kids dinner — and saw firsthand how overdraft fees punish the poor
By Bobbi Dempsey
Bobbi Dempsey is a reporting fellow at the Economic Hardship Reporting Project.
Yesterday at 6:00 a.m. EDT
Like many people who are or have ever been poor, I have plenty of stories about the costly and embarrassing ramifications of overdraft fees. Once, a $5 can of baby formula triggered a cascade of fees and penalties so substantial that it ended up costing me hundreds of dollars by the time I was finally able to get my account back in the positive.
Another time, I was thrilled to receive a $200 freelance payment in the mail and rushed to deposit it into my checking account — which at that point had a balance of around $3. In my excitement, I failed to realize that my bank would hold the check for three business days before it “cleared” and was officially credited. On my way home from the bank, I treated my kids to Happy Meals. The $10 transaction went through but sent my account into the negative, causing me to incur more than $100 in fees before I knew what had happened.
Low-income people suffer the consequences of overdraft fees more than those who are financially comfortable — by a huge margin. A study by the Consumer Financial Protection Bureau (CFPB) found that while only 9 percent of checking accounts are considered frequent overdrafters, they incur almost 80 percent of all overdraft fees. These fees, which typically run $35 or more, are often imposed in multiple per-transaction batches. Coupled with daily negative-balance fees, they disproportionately hit those who can least afford them. The CFPB study revealed that the typical frequent overdrafter has an average end-of-day balance of less than $350, compared with an average balance of more than $1,550 for customers who aren’t overdrafters.
Overdraft fees seem almost intentionally designed to keep the poor trapped in poverty. Once the cycle of overdraft fees begins — often initiating a rapid downward spiral of overlapping accumulating fees and daily charges — you’re trapped in a hole that is difficult, and expensive, to get out of. This seems especially cruel when you are already starting out with a huge financial disadvantage. According to the CFPB study, consumers who overdraft frequently have median credit scores of less than 600, and roughly 20 percent of frequent overdrafters do not have a credit score at all.
Banks aren’t exactly motivated to help these financially struggling consumers, though, when overdraft fees are a steady source of significant revenue. Banks charged customers more than $12 billion in overdraft and related fees last year, according to the FinHealth Spend Report 2021, produced by the Financial Health Network — and the bulk of those fees were incurred by people categorized as “Financially Coping” or “Financially Vulnerable.”
{snip}
Twitter: @bobbidempsey
Read more from Outlook:
By Bobbi Dempsey
Bobbi Dempsey is a reporting fellow at the Economic Hardship Reporting Project. Twitter https://twitter.com/bobbidempsey
I bought my kids dinner — and saw firsthand how overdraft fees punish the poor
By Bobbi Dempsey
Bobbi Dempsey is a reporting fellow at the Economic Hardship Reporting Project.
Yesterday at 6:00 a.m. EDT
Like many people who are or have ever been poor, I have plenty of stories about the costly and embarrassing ramifications of overdraft fees. Once, a $5 can of baby formula triggered a cascade of fees and penalties so substantial that it ended up costing me hundreds of dollars by the time I was finally able to get my account back in the positive.
Another time, I was thrilled to receive a $200 freelance payment in the mail and rushed to deposit it into my checking account — which at that point had a balance of around $3. In my excitement, I failed to realize that my bank would hold the check for three business days before it “cleared” and was officially credited. On my way home from the bank, I treated my kids to Happy Meals. The $10 transaction went through but sent my account into the negative, causing me to incur more than $100 in fees before I knew what had happened.
Low-income people suffer the consequences of overdraft fees more than those who are financially comfortable — by a huge margin. A study by the Consumer Financial Protection Bureau (CFPB) found that while only 9 percent of checking accounts are considered frequent overdrafters, they incur almost 80 percent of all overdraft fees. These fees, which typically run $35 or more, are often imposed in multiple per-transaction batches. Coupled with daily negative-balance fees, they disproportionately hit those who can least afford them. The CFPB study revealed that the typical frequent overdrafter has an average end-of-day balance of less than $350, compared with an average balance of more than $1,550 for customers who aren’t overdrafters.
Overdraft fees seem almost intentionally designed to keep the poor trapped in poverty. Once the cycle of overdraft fees begins — often initiating a rapid downward spiral of overlapping accumulating fees and daily charges — you’re trapped in a hole that is difficult, and expensive, to get out of. This seems especially cruel when you are already starting out with a huge financial disadvantage. According to the CFPB study, consumers who overdraft frequently have median credit scores of less than 600, and roughly 20 percent of frequent overdrafters do not have a credit score at all.
Banks aren’t exactly motivated to help these financially struggling consumers, though, when overdraft fees are a steady source of significant revenue. Banks charged customers more than $12 billion in overdraft and related fees last year, according to the FinHealth Spend Report 2021, produced by the Financial Health Network — and the bulk of those fees were incurred by people categorized as “Financially Coping” or “Financially Vulnerable.”
{snip}
Twitter: @bobbidempsey
Read more from Outlook:
By Bobbi Dempsey
Bobbi Dempsey is a reporting fellow at the Economic Hardship Reporting Project. Twitter https://twitter.com/bobbidempsey
12 replies
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and had no cushion in my bank account, one of the three jobs I had cobbled together was teaching piano lessons. A great way to earn a little extra--unless the parent of two of your students, who's already a month behind in payments, gives you a check that bounces, which causes a couple checks that you wrote to bounce, and it snowballs after that.
