October 27, 2009

OVERDRAFT FEES -- Constancy Amidst Change

If you've paid any attention to the media in the last month, you're well aware of the credit card company "ploys" that have been employed to trap consumers (i.e., changing interest rates, fees, and other information) prior to the C.A.R.D. reform scheduled to take effect on Feb. 22, 2010. Some of the recent tactics include closing card accounts, hiking interest rates on existing balances, cutting credit lines, and raising minimum payments. Think you're immune because you don't carry a balance? Think again ... B of A (which already raised rates last June) has moved onto plan B, "experimenting" with annual fees of $29 to $99 based on "risk and profitability" (meaning those of you that don't carry a balance/pay in full monthly).

If you're trying to find a silver lining, there is a small one. One of the card reforms that occurred last August now requires companies to provide a 45 day notice prior to 'significant' changes in contract terms. Accompanying the notification will be steps to take to either close the account or to opt out of the new terms and maintain the old terms (which will close the account but allow you to pay off any debt at the prior terms). The bottom line is that with all of the changes taking place, you'll want to start paying closer attention to the 6-pt font correspondence/legalese your CC company sends you.

Well, amidst all of the turbulence and change, there has been one constant ... Overdraft fees! I read a study this week that was published by the Center for Responsible Lending about the "explosion" in overdraft fees that have increased 35% in the past two years (not a bad move in revenue in recessionary times)!

Current standard practice for most banks and credit unions is to automatically enroll checking account customers in an expensive overdraft program that generally generates fees of nearly $35 per overdraft. Fortunately, this "service" as most institutions perceive them, will also be modified with the upcoming (February) reform. Consumers will need to authorize financial institutions to provide overdraft "protection" as opposed to simply letting the charge be denied. The CRL findings report that the majority of consumers (~80%), including those that have recently overdrawn their accounts, would prefer that overdrafts not be covered. Obviously this would be very easy to implement as the vast majority of overdraft fees are triggered by debit card transactions and ATM withdrawals, not by checks. In addition to authorizing the overdraft, the law also states that the fees must be "reasonable." Who knows what that means. The fact that over 25% of all debit card transactions are for purchases of less than $10 indicates that a $35 fee would not be reasonable. The fees are currently more than twice the amount of the original overdraft amount. Overall in 2008, consumers owed $45 billion for the $21.3 billion of credit that was extended. Unfortunately, the most likely to fall into this trap? Lower income groups and young adults (18-25).

To put the ridiculousness of overdraft fees into perspective, consider this. Americans will spend considerably more on overdraft fees this year ($23.7B) than books ($14.2B) or postage ($18.3B).

Additional Findings of Interest:
* 50+ million checking accounts overdrawn over 12 month period.
---> Over 1/2 of those (27 million) had 5+ overdraft incidents.
---> 18 million consumers had 10+ overdraft occurrences.

* Banks/CUs collected nearly $24 billion in overdraft fees in 2008.
---> Analysts estimate this will balloon to $27 billion for 2009.

* Banks make more on covering overdrafts than CC penalty fees.

Additional Resources:
-- Center for Responsible Lending Full Report
-- FDIC Study of Overdraft Programs
-- Overspending on Debit Cards is a Boon for Banks (NY Times)
-- Proposed Amendments to Regulation E