Consumer Watchdog: Overdraft ‘protection’ is banking’s greatest scam

For this week I just want to get something off my chest. Every time I log into my online bank account, I get a pop-up ad that urges me to “avoid the hassle of debit-card declines” and sign up for a deceptive rip-off.

Some banks call it debit-card overdraft “protection.” Others call it “coverage.” Either way, it’s a misnomer if I’ve ever heard one. What it really means is that if you “opt in” to this racket and then overdraw your account using your debit card, the bank will slam you with a fee that’s typically about $35. On the other hand, if you incur an overdraft with your debit card and have not signed up for “protection” or “coverage,” the bank charges no fee at all.

Confusing, I know, and here’s how it happened: In 2010, to address widespread complaints that consumers were being charged $35 overdraft fees for buying $2 cups of coffee, federal regulators enacted a requirement for banks and credit unions to obtain a customer’s consent before they could charge fees for allowing overdrafts on most ATM and debit-card transactions. If a customer does not “opt in,” the institution has to decline the transaction and is not allowed to charge a fee.

So the banks got creative and began marketing these fees as a service, persuading folks to “opt in” so they might avoid the embarrassment of having their debit cards declined at the register for insufficient funds.

Please note: “might” is the operative word here.

Let’s say you want to buy a $50 of groceries with your debit card but only have a $3 balance in your account. As Chase explains, with “Debit Card Coverage, we may approve these … transactions for you, at our discretion.” At Citizens Bank, “if you enroll in Debit Card Overdraft Coverage, we may approve and pay at our discretion.”

“At our discretion” means even if you enroll in the “coverage,” your card might still be declined and you’ll be embarrassed anyway. If you have insufficient funds and the purchase is approved, the $50 groceries will cost you $85. Can you say “loan sharks?”

“Opting in” can really cost you when it comes to certain debit-card purchases, like gasoline, that don’t post to your account immediately. Let’s say you have $115 in your checking account. You swipe your debit card and pump $40 worth of gas, and a temporary $1 hold is placed against your available funds. Forgetting you purchased the gas, a day later your available balance is $114, and you buy a $70 jacket in one store and a $44 pair of pants in another. The next day you check your balance, and the full $40 gas purchase has posted, in addition to the transactions for the jacket and pants. You smack yourself in the head because you’ve overdrawn your account by $39.

If you don’t have debit-card overdraft “protection” or “coverage,” your balance will be just that – minus $39.

If you do have that “protection” or “coverage,” you should smack yourself in the head twice because your balance will be minus $109. By “opting in,” you gave the bank permission to charge you overdraft fees on each debit-card transaction that causes an overdraft. In this case, that’s $70 – $35 for the jacket and another $35 for the pants.

Last summer the federal Consumer Financial Protection Bureau reported a study that found most debit-card overdraft fees are incurred on transactions of $24 or less and that the majority of overdrafts are repaid within three days.

The CFPB noted in lending terms, that means consumers who borrow $24 for three days and pay the median overdraft fee of $35 get walloped with a 17,000 percent annual percentage rate.

Maybe that’s why in 2013, banks and credit unions raked in $31.9 billion in overdraft fees.

Come to think of it, “protection” and “coverage” are exactly the right words for this debit-card game because it offers the banks plenty of both.

If you’ve been charged with overdraft fees that you feel are excessive or unfair, file a complaint with the CFPB at

They’re very responsive, and there’s a pretty good chance they’ll get you a refund. Please let me know how it goes.