While banks are raking in fees on overdrafts, their revenues from credit card fees are down. Consumers are either paying on time to avoid late fees or falling behind to the point of delinquency. Whichever choice they make the banks loses out on fees or on write offs.
Over limit fees on credit cards will no longer be legal without the consumer's permission beginning in Feb. 2010 when the Credit Card Accountability, Responsibility and Disclosure Act of 2009 goes into effect. Other provisions of that bill will also lower fees and put controls on interest rates credit card companies can collect.
So the banks now look to overdraft fees to make up some of the shortfall. The highest overdraft fees are being charged by the largest banks, including Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC). The median overdraft fees for these banks that took bailout money from the government is $33.
Some of the banks driving up their overdraft charges include:
- At Bank of America, a customer with an overdraft of just $6 can get a $35 penalty. If the customer doesn't realize his or her mistake, he or she can be charged up to 10 overdrafts in a day, or $350. Banks usually clear the highest check first, so many small checks can be thrown into overdraft before a customer knows it, since multiple checks can clear on the same day.
- Chase has tiered overdraft fees. The first overdraft in a 12-month period is charged at $25. The second to fourth at $32 and the fifth is $35.
- SunTrust (STI) charges $36 from the first overdraft.
- Citizens Bank charges a $39 overdraft fee after three overdraft items.
The Consumer Federation of America found that five of the ten largest U.S. banks have raised their overdraft fees in some way in the last year. Banks say its because overdrafts are very risky, but consumer groups question that reasoning because most people have their paychecks automatically deposited, so where's the risk?
As banks jack up fees on overdrafts, they cut credit lines on consumer credit cards. For example, Capital One's (COF) investment portfolio grew by $12.6 billion in the last year as of June 30, but its loan portfolio shrunk by $4.3 billion in the second quarter.
Capital One expects to begin making more loans when the economy improves, but with consumers stretched to their limits and credit frozen, how does Capital One think the economy will improve? Consumer spending has driven us out of most recent recessions. In reality, banks need to start lending again if they want consumers to spend. Jacking up fees and making it even harder for consumers in this recession will only prolong the downturn.
Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score.