About half of Americans report the coronavirus pandemic is already having a negative effect on their income. To combat their worries about paying the bills, two Democratic senators are introducing a bill that would keep consumers from paying unnecessary bank fees.
Former presidential candidate Sen. Cory Booker (D-N.J.) and Sen. Sherrod Brown (D-Ohio) introduced a bill on Sunday that would bar banks, credit unions and other financial institutions from charging overdraft fees until the coronavirus crisis is over.
The two lawmakers have also pushed for the measure to be included in the federal relief package that is currently pending in the Senate.
"Millions of hardworking Americans have been thrown into financial insecurity because of this unprecedented global pandemic. For these individuals, and those vulnerable before the outbreak, one $35 overdraft charge can lead to financial free fall," Booker said in a statement.
Banks typically charge overdraft fees when you overdraw your checking account. Instead of having your debit card declined or the purchase cancelled, your bank will cover the difference and charge you an overdraft fee, usually about $30 to $35.
These can get expensive quickly. An overdraft fee of $35 on a $100 purchase would quickly become a $135 purchase. That markup is significantly higher than what a typical credit card would charge in interest.
Plus, you may not get notified right away that you've overdrawn your account, and instead, rack up multiple fees per day. On average, big banks tend to cap the number of overdraft fees at four to six per day, but some allow up to 12 per day, according to ValuePenguin's analysis of policies at the 16 largest U.S. consumer banks. And if you do have multiple charges that come in on the same day, a 2018 report by the Center for Responsible Lending found that some banks process the most expensive transaction first, causing consumers to incur more overdrafts.
"At the height of this pandemic, hardworking Americans should be protecting their health, not worrying about big banks slapping them with fees for small overdraft amounts. This bill would allow them to keep money in their pockets when they need it most," Brown said.
Last year, overdraft fees alone brought in $34.6 billion in revenue for financial companies in 2019, according to financial research company Moebs Services. And these charges, unsurprisingly, are some of the most complained-about bank fees. There were roughly 1,600 customer complaints lodged about overdraft policies tied to checking accounts last year, according to the Consumer Financial Protection Bureau's database.
The proposed bill would not only block banks and financial institutions from charging overdraft fees. It would also block the similar "non-sufficient fund fee," which is charged when a check bounces in any transaction, including with any recurring bills you may have. It would also bar financial companies from reporting overdrafts to credit bureaus.
Typically overdraft fees don't affect your credit score, but if you do overdraw your account and do not fix your outstanding balance in a timely fashion, you could be sent to collections. That may, in turn, negatively impact your credit score.
While it remains to be seen whether the legislation from Booker and Brown will be included in a major stimulus package or pass independently, (no vote has been scheduled yet), several banks — including Ally, Bank of America and Santander — have already voluntarily agreed to waive overdraft fees.
The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency also issued a joint statement last week encouraging banks to work with their customers who have been affected by the coronavirus pandemic. Their guidance included waiving overdraft fees, along with out-of-network ATM fees, late payment charges on credit cards and loans and early withdrawal penalties on CDs.
If you are worried about overdrawing your checking account, you can always opt out of your bank's overdraft protection, and you will not have to pay a fee. Instead, your card will be declined if there's no money in your account.
You can only opt out of overdrafts on one-time transactions made with your debit card, so if you use checks, or if you have recurring payments set up and you go over your current checking balance, you may still be charged an insufficient funds fee.
You can also eliminate overdraft charges by tracking your checking account balance regularly and keeping it from dipping too low.
Ramit Sethi, bestselling author of "I Will Teach You to be Rich," recommends making this easier by automating your bill paying and saving strategy. By creating a schedule of when money is automatically transferred from one account to another, or used to pay bills, you don't have to remember to move money around yourself, Sethi says. Plus you can time it to leave your account to right after you get paid, so you know the money will be there.
That said, during this current health crisis, many people are struggling with their finances, regardless of their ability to keep track of their expenses. So it's especially important to either cancel overdraft protection or double check you have money in your account before you make purchases.