Nobody wants the embarrassment of seeing their debit card declined.
To help, bankers came up with a seemingly beneficial solution. Overdraft protection is a service that allows card users to pay for items even if they temporarily do not have the funds, and it can help consumers potentially avoid such awkward problems.
However, what seemed like a good idea may have been taken too far: and now, overdraft protection is a key source of profits for banks.
Here’s an explanation of how overdraft protection works, and why it tends to hurt consumers more than it helps.
Banks charged U.S. consumers $34.3 billion in overdraft fees in 2017 – and now, the average overdraft fee is $33.23, a high cost to pay for allowing a potentially small transaction to go through.
Some experts say that overdraft fees can set some account holders into a “downwards spiral”, where negative account values lead to even more overdraft fees.
For this reason, financial institutions have been required by law since 2010 to give consumers an explanation on overdraft policies, including the fees and alternatives.