This article is part of the Overdrafting in the United States report
OverdraftApps set out to learn just how hard Americans are hit by overdraft fees, or fees incurred when a bank charges customers for letting them use more money than they have in their accounts (either by linking their checking account to another, like a savings account, or simply fronting them the money). Each bank has its own options for enabling this kind of activity, generally under the umbrella heading of overdraft protection programs, with fees ranging anywhere from $10 to $35 for each overdraft, depending on the bank. With Americans having paid as much as $35 billion in overdraft fees per year in the past, the problem seems to be one in urgent need of addressing.
Having surveyed 1,009 people ages 18 to 71 from 46 of the United States (excluding Wyoming, Vermont, Alaska and Hawaii), we found both that overdrafts were quite common, and that there was a great deal of confusion around how and why they happen. As many as 46% of Americans said they had overdrafted at least once in the past year, with 39% saying they were not aware they could opt out of overdraft protection (that is the programs enabling them to overdraft in the first place). And approximately 42% of respondents said they had overdrafted but didn’t realize it until later. The study also found that another 13% of Americans had overdrafted three to nine times in the past year, and 5% had overdrafted more than 10 times in the past year.
When it comes to having agency over this kind of activity, the survey found that 39% of consumers had opted into overdraft protection at their banks, but when asked why they had done so, nearly a fourth (23%) said they weren’t aware they could opt out. Nearly a fourth (23%) also said didn’t remember whether or not they’d opted into overdraft protection, and 4% weren’t sure what it meant to opt into overdraft protection at all.
Why so much confusion around overdrafts? According to Theresa Schmall of the Center for Financial Services Innovation, the answer is multifold. First, the information is out there, people just aren’t paying attention.
“From the consumer level,” she says, “people don’t read long contracts when they sign up for their accounts, and they probably don’t read the emails that follow up. So they have all the communications, they’re just not reading it.”
Plus, Schmall adds, because banks profit from overdraft fees, they themselves are not incentivized to advertise overdraft protection. Changing this “would likely be an investment for banks where they’d lose all those overdraft fees,” she says. So it can also be hard for consumers to get a hold of this information. Ultimately, she says, for customers’ financial institutions to work for them, “It’s not just on the provider, it’s not just on the consumer — it needs to be the two working together.”
So how have respondents dealt with overdrafts when they happened? The study found that as many as 58% had called their banks to try to get the overdrafts reversed, while 26% said they’ve never tried because they didn’t think it would work. The latter is indicative of another trend found in the study: many Americans don’t trust their financial institutions and government. When asked if they ever felt like “the system,” whether political or financial, was trying to take advantage of them when it comes to financial products, the majority of respondents said they believed so. More than half, or 51%, said they often felt this way, 37% said they have felt this way a few times, and only 12% reported rarely feeling this way at all.
We also looked at how various populations overdrafted, including those in various income brackets. Instances of overdraft once or twice in the past year were surprisingly similar for each group of earners. Within those making less than $25,000, 23% overdrafted once or twice in the past year. Within those making $25,000 to $50,000, 32% overdrafted. Within those making $50,000 to $75,000, 30% overdrafted. Within those making $75,000 to $100,000, 23% overdrafted and within those making more than $100,000, 27% overdrafted.
What did differ between income brackets was the type of financial institution each preferred. Results showed that those who made less than $25,000 annually were most likely to use an online bank (30%), those who earned between $25,000 and $50,000 were most likely to use a traditional corporate bank (38%), and both those who made between $50,000 and $75,000 and made more than $75,000 annually were most likely to use a credit union (36% and 21% of credit union customers were in those income brackets, respectively). Our survey revealed that consumers who use online banks were the least likely to overdraft, while those using major banks were most likely to overdraft.
Another community our survey took a close look at was the LGBTQ community, just over 11% of respondents identifying as members. Study after study has proven that the LGBTQ community is financially disadvantaged, primarily due to issues like family rejection, discrimination in the workplace, housing discrimination and other socio-economic factors. Our survey found that income in the LGBTQ community is lower than in the general population.
Overdrafting was slightly more common in the LGBTQ community than the general population. While 54% of the general population reported never overdrafting in the past year, 47% of those in the LGBTQ community could say the same.
Unsurprisingly, those in the LGBTQ community were more likely to feel taken advantage of than those in the general population. When asked if they feel taken advantage of by “the system,” 61% of LGBTQ respondents said that they’ve often felt this way, compared to 51% of the general population.
Our survey also looked at homeowners versus renters. Homeowners were found to be slightly less likely to overdraft than renters. While 55% of homeowners said they hadn’t overdrafted in the past year, 51% of renters said they hadn’t.
Finally, we asked respondents if they knew they had to overdraft at all, was there something they’d prefer to overdraft on? As many as 49% said they were willing to pay an overdraft fee to pay for medical expenses, 54% said they were willing to pay a fee to buy groceries, and 19% said they were willing to pay a fee when shopping for clothes. We also asked people what they’d do if they happened upon an extra $1,000. We discovered most respondents were responsible: 60% would smartly pay off debt.