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Overdrafts earned the biggest banks $11.68 billion last year—and experts warn they could 'balloon exponentially' during the pandemic

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Roughly 2 out of 3 Americans who have lost jobs or had their paychecks reduced as a result of the coronavirus pandemic are worried about their ability to pay their bills, according to the latest TransUnion Consumer Financial Hardship Study. While about 60% of those surveyed are cutting back on their spending in an effort to stretch their budgets, many may wind up overdrawing their accounts and paying overdraft fees. 

Banks typically charge overdraft fees when you overdraw your checking account. Instead of having your debit card declined or the purchase canceled, your bank will cover the difference and charge you an overdraft fee, usually about $30 to $35. The similar "non-sufficient fund fee," is usually levied when a check bounces in any transaction, including with any recurring bills customers may have.

These fees add up. Last year, banks with assets of $1 billion or more charged customers $11.68 billion in overdraft and non-sufficient fund fees, according to a recent report from the Center for Responsible Lending. The total does not include credit unions or smaller institutions with under $1 billion in assets.

The number of overdraft fees could "balloon exponentially" as a result of the coronavirus crisis, the report finds. The high levels of under- and unemployment Americans currently face — the Labor Department's latest total shows 42 million people are unemployed — could cause financial strain and potentially lead to unprecedented volumes of overdrafts. 

"People are spending more money on health care costs. They're losing their jobs. They're losing hours at their jobs. All of this hits directly at the bottom line for customers," Peter Smith, a CRL senior researcher and co-author of Wednesday's report, tells CNBC Make It "People are already feeling financial distress."

Why overdraft fees can be problem

Bank overdraft practices cause problems for Americans in the best of times, but during the economic crisis caused by the pandemic, they can be devastating, Smith says. A $30 to $35 overdraft may not seem like a lot, but these fees can compound quickly for consumers. 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. That means you could easily end up with fees that range from $120 to $420 if you've overdrafted multiple times.

Banks will usually let you know if you've overdrafted, but it may not be until the end of a business day or hours after you've made several purchases. That may be too late, depending on how often you swipe your card. 

Many times, customers overdraft despite carefully attempting to avoid it because some banks will reorder how the purchases are transacted, posting larger expenses first so the account is depleted more quickly, CRL's report says.

Some banks also delay settling up with a vendor, a tactic regulators have flagged. A consumer will authorize or make a purchase when they have money in their account, but the bank will delay transferring the money. By the time the money is transferred, the account may no longer has sufficient funds, perhaps because a monthly rent payment was taken out, causing the purchase to overdraft the account.

Overdrafts started out on an ad hoc basis where a bank would advance valued customers more money than they had in their account, Smith says. But in an era of accelerated electronic payments and people spending money more quickly, plus the amount of control and information that banks have, "these are definitely abusive fees," Smith says.

How banks are responding during the pandemic 

Banks should be doing more to help customers avoid overdraft fees, especially now, Smith contends. "Maintaining overdraft fees as business as usual is really hurting people, especially in a time when people are experiencing a lot of financial distress," he says.

As of mid-May, none of the 10 largest banks — Bank of America, JPMorgan Chase, Wells Fargo, Citibank, U.S. Bank, Truist (formerly BB&T and SunTrust banks), PNC Bank, Capital One, TD Bank and HSBC — had offered any sustained relief from overdraft fees during the crisis, CRL's report found. These banks cap the number of overdraft fees per day at between three and six and all except Citi will waive overdraft fees if the overage is less than $5 (HSBC allows up to $10 overdrawn without charging overdraft fees), according to the CRL report. 

That's not to say banks are doing nothing during the pandemic. "While specific actions vary by institution, banks across the country continue to provide unprecedented assistance to customers affected by the Covid-19 pandemic. This includes fee waivers, deferred payments and other accommodations depending on the customer's individual circumstances," Mike Townsend, a spokesman for the American Bankers Association, said in a statement to CNBC Make It.

While no bank has indefinitely suspended all overdraft fees, several banks, including Bank of America, PNC and Wells Fargo, have introduced programs that waive or refund overdraft fees upon request, the banks told CNBC Make It on Thursday. 

Additionally, PNC, Truist and U.S. Bank all told CNBC Make It that they are proactively waiving or refunding outstanding overdraft fees on accounts receiving stimulus deposits, as well as providing temporary credits to accounts with a negative balance. Chase declined to comment, while the other banks cited in the report did not immediately respond to requests for comment. 

About 45% of consumers say they've reached out to companies, such as their bank and utility provider, to discuss payment options, according to TransUnion's survey. Yet that can be time-consuming. With so many Americans juggling different responsibilities since the pandemic started, things may slip through the cracks, Smith says. 

"Banks are asking people to spend an hour on hold to get the fee reversed. We just don't think that's a good way to structure it, for the burden to be on the customer to ask," Smith says. 

In March, Senators Cory Booker (D-N.J.) and Sherrod Brown (D-Ohio) introduced a bill that would bar banks, credit unions and other financial institutions from charging overdraft fees until the coronavirus crisis is over. The bill, however, has not yet made it into a stimulus package or onto the Senate floor for a vote. 

How to avoid overdraft fees

If you are worried about overdrawing your checking account, you may want to consider changing banks. Some banks offer checking accounts without monthly fees or overdraft fees, including Key Bank's Hassle-Free Account and Discover Bank's checking account.

Other banks are rolling out similar products. In March, Wells Fargo announced it would start offering early next year a bank account without the option to get checks that would not incur overdrafts or insufficient funds fees. It also announced another with the option for checks that would cap overdraft or insufficient funds fees at one per month.

Several other banks, including Ally Bank, announced that they will automatically waive overdraft fees during the coronavirus pandemic. There's no need for consumers to request it specifically. 

If your bank isn't waiving overdraft fees, you can opt out of the overdraft protection program. Instead of paying a fee, 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 have recurring payments set up and you go over your current checking balance, you may still be charged an insufficient funds fee.

That said, it's especially important to double check you have money in your account before you make purchases right now. With many accounts, you can set up text or email alerts to notify you if your account falls below a certain threshold. If that fails and it's your first time overdrafting, your bank may be willing to work with you.

Check out: The best credit cards of 2020 could earn you over $1,000 in 5 years

Don't miss: Lawmakers put banks on notice: Stop charging overdraft fees during the coronavirus pandemic

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