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In the early 2000’s, banks discovered that they could make a lucrative profit from increasing the rates that they charge for overdraft fees incurred by people that use debit cards that are linked to their checking account.  Because the banks could make a great deal of money with little or no effort on the part of the bank, many of the banks grew addicted to these profits and tried to find ways to make the process even more profitable.  Today, the actions that the banks have taken regarding overdraft fees have angered much of the nation to the point where Congress is considering passing legislation reining in these practices.

Overdraft fees have become part of a contentious debate over the ways that the banks are choosing to do business with the general public.  Although the banks claim that they are doing nothing wrong, many opponents of these practices claim that the banks are preying on their most vulnerable customers and taking advantage of the situation.  Most of the problems stem from the changes that have been made to bank overdraft policies over the past decade.

How Overdraft Policies Have Changed

In the past, banks used to charge around $10 for an overdraft that occurred with a debit card linked to a checking account and that was only if the customer signed up for overdraft protection at the bank so that the transaction would not simply be denied.  Then banks started automatically enrolling all of their debit card customers into their overdraft protection program and automatically authorizing transactions that put their customers over their account balance.  The banks also eliminated the cap on the number of overdraft charges that a person could incur on a single account in a single day and starting charging an overdraft fee for every transaction that overdrew the account, often as much as $35 per occurrence.

Because of the success of these methods at bringing in profits, the banks instituted some other questionable practices seemingly designing to maximize the amount of overdraft charges that their customers would incur.  One such practice was changing the ways that transactions were processed, from chronological order to processing transactions from biggest to smallest.  According to the banks, this was supposed to ensure that the more important transactions were processed first and not denied, but the result was that many people incurred multiple fees for low dollar transactions, such as cups of coffee, magazines, or fast food lunches, instead of a single fee if the transactions had been processed in the order in which they occurred.

As a result, banks and credit unions obtained close to $24 billion in overdraft income during 2008, according to a report from the Center for Responsible Lending.  This was 35% higher than the total from two years prior.  As a group, Americans are spending more of their income on overdraft fees than they spend on fresh vegetables, cereal for breakfast, or books.  The best course of action for consumers today is to try to avoid debit card overdrafts by keeping careful records of deposits into the checking account and how much has been spent using checks and debit card purchases.