Myth of the Responsible Neighborhood Bank is Long Gone

Based on a recent analysis of banks by the FDIC the Center for Economic and Entrepreneurial Literacy warns consumers that bank overdraft fees are more costly than any other imaginable loan.

Fees can eclipse those of payday lenders

As we discussed here at Auto Credit Express in a recent article, a recent report by the Federal Deposit Insurance Corporation made an analysis of bank overdraft fees and practices and found that a large portion of lending institutions within the Federal banking system were charging billions of dollars a year in overdraft fees.

Today, the Center for Economic and Entrepreneurial Literacy also weighed in on the report with the following press release:

WASHINGTON, Dec. 8 — On the heels of a new FDIC study showing that banks are charging Americans billions of dollars in overdraft fees, The Center for Economic and Entrepreneurial Literacy (www.Econ4u.org) is educating consumers about the importance of avoiding these fees. Most people do not realize that a bank overdraft fee comes at a higher interest rate and greater cost than any other imaginable loan.

A customer who makes an on-premise purchase with a debit card and overdraws their account by $20, paying it back two weeks later, will suffer an average overdraft fee equal to 3,520 annual percentage rate (APR) in interest. And it could be even worse! If the customer overdraws by just $1 and pays it back in two weeks, some of the higher bank fees – $37 or more – are the equivalent of 96,200 percent APR. Those interest rates dwarf by wide margins what a borrower would pay for a wire transfer loan from a friend or family member, a credit card cash advance, or a short-term payday loan.

The small sample of banks surveyed by the FDIC earned $1.97 billion in overdraft-related fees in 2006, representing 74% of their overall $2.66 billion in service charges on deposit accounts. Outside groups estimate that banks in total cleared $17.5 billion in 2007 in overdraft fees alone.

Large banks often reorder transactions from largest to smallest in order to maximize the number of charges and fees they can collect for overdrafts or bounced checks. It is estimated that that nearly half of consumers pay overdraft fees every year! And the FDIC survey found that the most vulnerable Americans – youth and those with lower incomes – were more likely to be hit with these fees.

“Borrower beware: The myth of the responsible neighborhood bank is long gone, as the most vulnerable Americans are being hit with hidden fees and service charges,” said James Bowers, managing director of the Center for Economic and Entrepreneurial Literacy. “Somehow overdrafting checking accounts became a common practice, particularly among young Americans. The public needs to understand that the interest and fees on these overdrafts are far more expensive than any other conceivable form of short-term borrowing.”

The Bottom Line

Here at Auto Credit Express, we feel that the informed consumer is our best customer. We also feel that charging usurious rates – whether from payday lenders or the bank down the street – is an unconscionable act by these lending institutions.

Posted on December 8, 2008 by in FICO score
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