Are your small purchases adding up to big fees? CNN Money reports on a report recently released by the Consumer Financial Protection Bureau (CFPB) that shows that overdraft fees are big business for banks — and can translate into an interest rate of as much as 17,000 percent.
Small purchases = big fees
One of the reasons that the interest rate is so high when translated into an APR is due to the fact that many of the purchases triggering overdraft fees are small. When your morning coffee purchase triggers an overdraft fee of $34 (the reported average), it’s not much of a stretch to get what translates into a hefty fee.
According to the CFPB, another part of the problem is the fact that many consumers actually repay the overdraft charge within a few days. Combine this quick repayment with the fact that, in some case, the overdraft fee is many times the purchase price, and you end up with an excessively high interest rate.
The realities of the situation aren’t the only things that trip up consumers. According to the CNN Money article, there are banks that purposely order transactions in order to run up as many overdraft fees as possible. Instead of ordering transactions the way they come in, banks might take out the bigger purchases first, depleting the bank balance faster. Then, the smaller purchases that come in are the ones that trigger the overdraft — and there are often more of them, so banks can charge more fees.
It’s not surprising that banks are loathe to change their practices, though. Reports indicate that overdrafts amount to more than half of the fee income banks receive from checking accounts.