Many Americans have learned that having less often means paying more—especially at the bank. Low-income households are already at a disadvantage when it comes to financial health and general wellness, but living paycheck to paycheck often means your financial institution will penalize you with additional charges.
Take overdraft fees: Overdrafts occur when there is not enough money in one’s checking account to cover a charge, and this can result in the charge being declined. To prevent this embarrassment and inconvenience, many banks have created a variety of options. For a small fee, a bank might automatically pull money from another account at the bank (this is usually called “overdraft protection”). For a larger fee—up to $35 per transaction—a bank might allow multiple charges to go through; they’ll simply front you the money, like a credit card, until they can deduct that amount from a future deposit.
Small Overdrafts, Disproportionate Effects
These fees, however, seem to benefit banks more than consumers. In 2019, banks collected $11.68 billion in overdraft-related fees, according to a report by the Center for Responsible Lending. And a 2015 Pew Research Center survey found that nearly 7 out of 10 frequent overdrafters made less than $50,000 a year, and the median charge that incurred a fee was only $24. Since the fees are often higher than the charges the overdraft protection covers, that means the bank is essentially extending short-term credit to the client at an astronomically high cost.
Individuals on a fixed income are particularly at risk, because one or more of these fees may hit the account before the balance is restored, triggering yet another overdraft fee. Anthony Mangano, for example, lives with a chronic illness that prevents him from working, and his fixed income leads to occasional overdraft fees that are an additional burden to bear. “I think overdraft fees are inappropriate for households on limited income or disability; I wish they’d do away with them,” Mangano says via email. “They’ll clear something at 11:59 p.m. the night before a payment clears just so they can nail you with an overdraft fee if your bank account doesn’t have enough money to cover it.”
Mangano has had success getting some overdraft fees waived when he or his wife calls the bank and explains the circumstances. However, seeing a substantial fee on your account when you are living paycheck to paycheck is a source of anxiety and frustration.
A wide variety of overdraft charges occur for circumstances unrelated to spending too much: With the rise in online purchasing and subscription services, companies occasionally double-charge a single account. While the company may refund the erroneous double-charge, the customer must then contend with the bank to try to get the fee waived.
And joint account holders can unknowingly trigger an overdraft fee if both people aren’t aware of the timing of each other’s purchases.
Individual Power and Policy Change Needs
Some lawmakers have introduced legislation to improve the situation for low-income bank customers, but until changes occur, there are also things customers can do to prevent over-drawing their accounts and incurring fees. Kara Stevens, founder of The Frugal Feminista, a personal finance website and online community, advises tracking your most common expenses and when payments hit your account so you can adjust accordingly. “Rather than having recurring payments come on the first or second of the month, right when direct deposit are expected, consider moving the dates to the fourth or fifth, in case of tech issues,” she suggests.
If you’re able to maintain a buffer of additional cash in your account, that can help, too. An emergency buffer of $50 or $100 might be enough to avoid an accidental overdraft caused by a debit-card purchase, but if it’s at all possible, a larger emergency fund is advisable. While a J.P. Morgan Chase Institute study on weathering income volatility suggests mosts households need about two and a half weeks of take-home pay saved in order to deal with an unexpected expenditure, it notes that 46 percent of households lack that buffer.
The Consumer Financial Protection Bureau offers a useful fact sheet for preventing overdraft fees. One suggestion: You can often opt out of overdraft protection and accept that payments will be declined if you have insufficient funds. But if you go that route, you’ll want to have an emergency prepaid debit card or a credit card that you can pay off as soon as your paycheck hits.
Stevens says banks are increasingly recognizing how much people appreciate fee-free banking. For example, mobile banks like Chime and Moven offer accounts without overdraft fees. But, she cautions, for some people, the threat of the fee can be a helpful guardrail against overspending. Everyone has to know their own tendencies. “When you are working to change your money habits, it’s important to get as much support as possible, but you may know that this extra support will just make you spend more,” says Stevens. “Make sure you are at a bank that meets your needs.”
Ultimately, a combination of legislation and competition from customer-friendly banks may bring about changes to the financial system, but consumer education is still a priority. “Personal finances connect to your sense of well-being, and feeling financially secure gives you a level of peace,” says Stevens. “Having that peace can also give you clarity and confidence when it comes to managing your money.”
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