By Juliette Fairley
Some 50% of Americans who fall into overdraft do so, because they don’t know their account balance, according to a recent survey from GoBankingRates. That lack of knowledge is extra dangerous when it comes to the overdraft policies of banks, and consumer advocates are fighting back to end these misleading overdraft bank policies that prey on consumers.
“Overdraft on ATM withdrawals and debit purchases is a debt trap that pushes lower income people out of the banking system,” said Josh Zinner, co-director of New Economy Project. “Regulators should ban this.”
The Psychological Underpinnings of Overdraft: Ego And Head-Scratching
It all comes down to a matter of hubris and confusion.
The tendency to make debit card purchases with money that’s not in an account is not about frivolous spending: the GOBankingRates study found that 23% of consumers who overdraft do so, because they say they need to make a purchase. But that purchasing power can lead to an inflated sense of self.
“Feelings of grandiosity and omnipotence pump up consumers when they get that high,” said Dr. Jeanette Raymond, licensed psychologist and author. “In the moment, they believe that nothing bad can happen or will happen just like a junkie on a fix who thinks he can jump off a tall building and survive without injury. Risk taking is intoxicating.”
Adding fuel to the fire of self-aggrandizement is confusion. The information provided by the nation’s biggest banks are inscrutable despite overdraft opt in rules, according to data released by four housing organizations, including the California Reinvestment Coalition (CRC) of Oakland.
“Overdraft opt-in rules are clearly not enough to protect consumers from this expensive product,” said Paulina Gonzalez, executive director with the CRC.
Under overdraft opt in rules, banks are required to allow debit card customers to opt-in to overdraft fees rather than automatically enrolling card users in programs that charge some $30 when there are insufficient funds to cover purchases. As a result, consumers could have their debit cards denied at the cash register if they do not opt in and attempt to buy without enough money in their accounts to cover the cost.
The New Economy Project of New York, the Reinvestment Partners of Durham and the Woodstock Institute in Chicago are calling upon federal banking regulators and the Consumer Financial Protection Bureau (CFPB) to strengthen consumer protections for all overdraft products.
“The results of our investigation show that there is clearly more work to be done to ensure that consumers can avoid a cycle of high fees,” said Dory Rand, president of Woodstock Institute. On average customers get hit with a $32.74 charge every time they try to withdraw more money than they have in the bank, according to an Aon Hewitt study.
“People opting into overdraft protection may also be paying fees just for the privilege of having a checking account since one of the requirements to waive the monthly fee is maintaining a high balance,” said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling (NFCC). “This suggests that if a person struggles with overdrafts, they probably do not have a high balance in their account and are probably also paying additional banking fees.”
Beyond understanding the thought pattern underlying financial problems, being organized can go a long way in resolving frequent overdrafts.
“Get into the habit of recording each transaction when it is made, including ATM withdrawals and deposits,” Cunningham told MainStreet.
Other ways to reduce overdrafts include balancing the bank statement the day it arrives, setting up alerts with the bank to be notified when the balance is getting low and creating a cash-flow calendar of all paydays and when bills are due.
“Discussing with family what financial spending is agreed on and sticking to it or else getting the disapproval of family is probably going to be the most effective incentive to keep spending to a reasonable level and stop overdrafts,” Raymond told MainStreet.