Overdraft Fees Are Dwindling, Study Finds

Is there any benefit to having overdraft service?

Some people may want what banks call overdraft “protection,” to make sure important bills will be paid even if an account falls below the necessary balance. Customers must opt in to overdraft for debit and A.T.M. withdrawals. But banks don’t need your permission to charge overdraft fees for online payments or checks instead of letting them bounce.

Consumers have another option. They can link a savings account or line of credit to their checking accounts, so funds are automatically transferred if needed, avoiding an overdraft. Some banks charge a fee when you tap the backup funds, but many have also eliminated such “transfer” fees.

Are there low-cost alternatives for people needing short-term credit?

More banks are now offering automated small loans to their customers. Six of the eight largest banks (based on the number of branches) and seven big credit unions offer such loans, according to Pew. (The greater availability is due in part to guidance issued by financial regulators in 2020.)

The loans range from $5 to $1,000, depending on the bank, and can be far less expensive than relying on repeated overdraft coverage or borrowing from other sources like payday lenders, Pew found. For instance, borrowing $400 over three months from a payday lender typically costs $360 in fees, while banks are charging $24 or less for a loan of the same amount, Pew said.

The loans are considered safer because they are repaid in installments over several months instead of in one balloon payment. Some banks approve borrowers based on their transaction history, rather than their credit score, so customers with low scores who may not qualify for traditional loans can benefit.

Another option: “earned wage access” apps. The apps help workers avoid overdrafting by giving them early access to some of their paycheck to pay bills, said Todd J. Zywicki, a professor at George Mason University’s law school and a research fellow at the university’s law and economics center. “I’m a fan,” he said.

Some consumer advocates, however, advise caution because some apps may charge fees for fast delivery of the money, they said. Some encourage users to pay optional fees based on a percentage of the advance.