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8 Ways To Make Banking Cheaper

illustration of the front of a pillared bank with a chain attached to a dollar signHere’s another reason to put the debit card away.

If you wind up in the red, you’ll pay disproportionately high overdraft fees compared with other types of transactions, a new report by the nonprofit Center for Responsible Lending found.

From the study “High-Cost Overdraft Practices”:

“Because debit card transactions tend to be small and trigger average overdrafts of only $20, they incur the most expensive fees in terms of cost per dollar overdrawn ($1.75). Typically, the overdraft fee is nearly twice the size of the debit card overdraft itself. This is particularly striking since transactions on debit cards can be declined, at no cost to the consumer, when the account lacks sufficient funds.”

That cost per dollar overdrawn is three times more than what you’d pay if you bounced a check.

Overdraft fees cost Americans $16.7 billion in 2011, and debit card transactions accounted for a double-digit percentage of that total.

This was all supposed to be fixed by the Federal Reserve’s 2010 rule requiring you to opt in to receive overdraft coverage on our debit card purchases and ATM withdrawals.

This rule appears to have had little impact:

“Our analysis of 2011 data – the first full year following implementation of the opt-in rule – indicates that the types of transactions the Board intended the opt-in rule to cover are still triggering a very large percentage of all overdraft fees: Debit card purchases and ATM transactions still triggered at least 35% of all overdraft fees.”

Now the Center for Responsible Lending suggests 8 fixes for policymakers that would make banking cheaper:

  • Prohibiting overdraft fees on debit card and ATM transactions.
  • Prohibiting overdraft fees on prepaid debit cards.
  • Assessing the implications of the growing percentage of overdraft fees caused by electronic transactions, such as making online bill payments and using payment services such as PayPal.
  • Prohibiting transaction reordering – the practice of not deducting payments from your account in the order in which they’re made, but instead reshuffling them so the largest amount comes out first, increasing the likelihood you’ll overdraw your account multiple times.
  • Limiting the number of overdraft fees. The Federal Deposit Insurance Corp. says more than six overdrafts within a year is excessive.
  • Requiring overdraft fees to be reasonable and in proportion to the amount of the overdraft.
  • Requiring overdraft costs to be disclosed as an annual percentage rate.
  • Prohibiting overdrafts and fees from being automatically repaid from the consumer’s checking account.

These are not impossible goals to accomplish.

In fact, Bank of America, which is the largest debit card issuer, stopped charging overdraft fees on debit card transactions in 2010, and Citibank has never charged them.

At these banks, if you don’t have the money, your transaction will be declined.

While the Center for Responsible Lending’s recommendations seem like logical moves, the fees are a lucrative source of income for banks and credit unions, so unless the government implements such requirements, it might be hard to get financial institutions to keep their hands off your cash.

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