STEVE INSKEEP, host:
Inflation may be taking more of your money, and so are banks. It's getting more expensive to pay overdrafts on checking accounts. Consumer advocates say that's because banks have figured out new ways to make billions of dollars off people who spend more than they have.
Some banks are charging what amounts to more than a thousand percent interest on small purchases made with debit cards. NPR's Chris Arnold reports.
CHRIS ARNOLD reporting:
Thirty-four year old Kevin Cole(ph), of Rockford, Illinois, makes about $40,000 a year working for a construction trade magazine. It's a new job, because he was laid off from his last one, and he says with three kids, he and his wife have been in a real financial bind lately.
Mr. KEVIN COLE (Illinois): She got laid off also. So she does some work from home, but, you know, I have a mortgage and things are real tight for me.
ARNOLD: Cole recently got a statement from his bank, at National City Bank, and saw he'd been charged overdraft fees. And he noticed that on the day where he'd overdrafted his account by $30, the bank shifted the order of his debits and checks for that day, cashing the biggest check first.
He called the bank.
Mr. COLE: So I said, I asked them, I said, well this, I don't think this is the order I spent the money in. And they said, they told me that on any given day, they take out the largest withdrawals first.
ARNOLD: National City Bank says it does that as a service, because the biggest checks are often the most important to customers. Like mortgage, and car payments. But Cole says by cashing the biggest check first, instead of charging him one overdraft fee, the bank was able to charge him three overdraft fees on several small, $15 debit card purchases. That meant he got charged more than $100 in fees, when he only overspent his account by $30.
Mr. COLE: You could go to a loan shark and get a better interest rate. It's certainly outlandish.
ARNOLD: Many consumer advocates agree. Linda Sherry is with Consumer Action.
Ms. LINDA SHERRY (Editorial Director, Consumer Action): Biggest check first is a policy that a lot of banks have in check clearing. It's an anti-consumer practice, pure and simply. I'd leave a bank over it.
ARNOLD: In the case of National City, the bank says its not doing anything unusual.
Mr. BILL EISLER(ph) (Spokesman for National City Bank): National City's overdraft fee of $30 to $36 is within the range of industry norm.
ARNOLD: Bill Eisler is a spokesman for National City Bank.
Mr. EISLER: While overdraft fees recover some of the costs of processing the bank transaction, the fee is also intended to set a price point that discourages customers from irresponsible use of their accounts.
ARNOLD: And of course, one way to avoid any overdraft fees is to not spend more money than you have in your account. Most bankers will tell you that a responsible person should balance their checkbook and not write bad checks. But consumer advocates contend that many banks out there these days want customers to overdraft their accounts.
Mr. ED MIERZWINSKI (Consumer Program Director, U.S. Public Interest Research Group): This is a new thing where the bank is your enemy, trying to encourage you to pay them more in fees.
ARNOLD: Ed Mierzwinski's is with the U.S. Public Interest Research Group. He says I recent years, many banks have started combining this clear the biggest check policy with a practice - the industry calls it a service - known as courtesy overpay or automatic overdraft protection.
Basically, banks automatically extend credit to consumers when they overdraw their account so they can keep writing checks or using their debit card. Often the consumer doesn't get a warning right away, but they can be charged $25 to $35 each time they use their debit card, even if they're just buying a cup of coffee. The bank charges the same fee for that as for writing a bad check for a lot of money.
Mr. MIERZWINSKI: It used to be negative behavior - that the banks said you shouldn't do it. You're bad consumers when you bounce checks. Now the banks are embracing consumers who bounce checks, and making a lot of money from them.
ARNOLD: A new survey suggests that banks are making most of that money off of lower income customers.
Eric Halprin is a director with the Center for Responsible Lending, which surveyed bank customers around the country.
Mr. ERIC HALPRIN (Senior Policy Counsel, Center for Responsible Lending): There are a small percentage of overdraft users that pay the vast majority of the fees. Sixteen percent of the users pay over 70 percent of the fees. And these are the repeat users.
ARNOLD: Halprin says people who repeatedly get overdraft fees pay U.S. banks more $7 billion a year. He says these customers are most often low-income, single, non-white, and do not own a home. Halprin says, for some, these overdraft fees have become a regular form of extremely expensive credit. And he says, some get stuck in a cycle of paying so many fees that they run out of money the next month and incur yet more fees.
Mr. HALPIN: Overdraft loans are an incredibly expensive way to get your credit. For example, an $80 overdraft loan, at the standard average fee of $26.90, would be an over 1700 percent interest rate loan. And many banks actually offer a much cheaper credit program called the line of credit program, and even a 19 percent line of credit, which is relatively high, that same $80 one-week loan would cost you $0.29.
ARNOLD: Basically, the take-away here, is that if you let your bank set up your checking account, the fees will be very expensive. But if you go to a bank and say, I might bounce a check every once in awhile, so I want to set up a line of credit, you can usually get a much cheaper overdraft service if you push for it.
Chris Arnold, NPR News.
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