Here's How Consumers May Get More Protection Against Overdraft Fees

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KEY POINTS

  • Overdraft fees can hurt consumers who are already low on funds.
  • The Consumer Financial Protection Bureau is taking steps to stop banks from charging such hefty fees.

Soon, banks may have a harder time getting away with hefty overdraft fees.

It's not uncommon for consumers to spend more money than what they have available in their checking accounts. When that happens, banks often allow those transactions to go through despite a lack of adequate funds.

But they won't do so out of the goodness of their hearts. Rather, they'll hit consumers who go that route with overdraft fees.

Now it's easy to argue that overdraft fees are justifiable, because they give consumers the option to complete transactions in the absence of having enough money on hand to do so. The problem, however, is that those fees can be quite substantial. Typically, they amount to around $34 per overdraft transaction. And for someone who's depleted their checking account, that's a lot of money to have to pay.

In fact, you'd think that banks would discourage consumers from overdrawing their accounts. But actually, many banks make it far too easy for consumers to do so. That's because they want to collect those overdraft fees, which can be a big source of revenue.

Now, the Consumer Financial Protection Bureau (CFPB) is cracking down on banks that make a lot of their money on overdraft fees. That could really work to consumers' advantage.

Paying closer attention

The CFPB isn't planning to eliminate the practice of charging overdraft fees. But the agency just announced that it plans to increase its oversight of banks that are heavily dependent on overdraft fees for revenue. Just as importantly, the CFPB plans to take action against large banks with overdraft practices that violate consumer protection laws.

In 2019, JPMorgan Chase, Wells Fargo and Bank of America collected about $5 billion in overdraft fees from consumers. And many banks have continued to charge those fees during the pandemic.

But not every bank charges overdraft fees. Ally Bank, for example, got rid of overdraft fees earlier this year. And Capital One just announced that it's eliminating those fees beginning in 2022.

Still, not every bank will be inclined to get rid of those fees, so the CFPB plans to be more vigilant.

How to avoid overdraft fees

The simplest way to avoid overdraft fees? Check your bank account balance regularly, especially before making large transactions. That'll help you avoid incurring those fees by accident. But it won't help you avoid overdraft fees when you're forced to access money you don't have for emergency purposes.

To protect yourself in that regard, do your best to build up a solid emergency fund -- one with enough money to cover at least three months of essential living expenses. That money should be tucked away in a savings account so it's there for you when you need it.

Overdraft fees can cost consumers a lot of money -- and make those in an already tough financial situation struggle even more. The fact that the CFPB is taking a closer look at banks that commonly charge those fees is a move that could save consumers a lot of money going forward.

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