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In Checking Accounts, the Less You Have, the More You May Pay

Financial complexity doesn’t happen only on Wall Street. Even a basic checking account is often no longer simple, because account rules and fees can vary widely — so widely, in fact, that the annual cost can range from zero to more than $700, according to the 2014 survey of checking account costs by WalletHub, a consumer finance information and social networking site.

The general rule is that the less money you hold in a bank, the more you pay the bank in fees. The biggest fees fall on consumers who overdraw their accounts, a common practice among less-well-off customers, whom WalletHub calls “cash strapped.” People in this category typically don’t have credit lines or savings accounts to cover them when their balances drop below zero, and their fees add up.

To assess the amounts paid by these customers, WalletHub examined the annual fees on a checking account for someone who overdraws 12 times a year, uses an out-of-networkmoney A.T.M. once a month and averages an end-of-month balance of $50. The range of costs was enormous: as low as $2.83 at Capital One and as high as $735 at M&T Bank. (Capital One’s costs were low largely because it charges an 11.25 percent annual percentage rate on the amount a customer actually overcharges, instead of charging a fixed dollar amount in overdraft fees, which is typical in the industry. In addition, Capital One doesn’t assess out-of-network A.T.M. fees.) Over all, the average annual cost of a checking account for consumers in this category was $499.02.

People with more money tend to pay lower fees. In fact, WalletHub found, the average annual cost for customers whose monthly balance never drops below $5,000 and who use only their own bank’s A.T.M. machines was just $17.85.

That’s why customers who are short on cash can be valuable for banks. Hefty overdraft fees are often imposed for transactions that are quite small, the Consumer Financial Protection Bureau found in a July study. For debit card transactions, for example, the typical overdrawn amount is around $24 and paid back to the bank in less than a month, yet overdraft fees for such transactions are about $30, that study found. In short, many banks can turn a tidy profit on customers who have trouble making ends meet.

Despite New Opt-In Rules, Overdraft Fees Still Baffle Consumers

OverdraftIT has been nearly four years since rules went into effect to help clarify when banks may charge you penalties if you overdraw your checking account using your debit card. But many people remain confused about so-called overdraft fees, a new report finds.

The report from the Pew Charitable Trusts found that in 2013, 10 percent of adults with checking accounts paid at least one overdraft fee — that is, a fee for a short-term advance from their bank to cover a shortage in their checking account. Another 5 percent paid an overdraft transfer fee, charged for transferring funds from another account or a credit card. People who overdrew reported paying fees averaging $69. The typical overdraft fee was $35, but banks may add extra fees if the shortage isn’t covered quickly.

In 2010, federal rules took effect that required banks to ask customers to affirmatively choose — to opt in — if they wanted overdraft protection on their debit cards. That means that if you use your debit card to make a purchase or withdraw cash from an A.T.M., and overspend your balance, your bank will process the transaction and cover the shortage with a temporary advance, in exchange for a fee. If you don’t opt in, transactions are declined, with no fee.

Yet more than half of those who were charged an overdraft fee when using their debit card say they do not recall agreeing to the service, the Pew report found. That suggests the banks aren’t explaining their overdraft policies clearly and raises questions about how overdraft protection is marketed, the report said.

Susan Weinstock, director of consumer checking for Pew, said in a briefing with reporters that a suggested form for explaining overdraft options, provided by the Federal Reserve for use by banks, may be confusing for consumers. “That form needs some work,” she said. Pew has proposed a simple disclosure box that banks could use to explain overdraft options to their customers. “It would help resolve the confusion that we have seen is so prevalent in the marketplace,” she said.

Still, the report noted that the proportion of people who said they had paid at least one overdraft fee had declined two percentage points, from 12 percent in a survey Pew did in 2012. Ms. Weinstock said it was not clear what caused the decline. The proportion of people paying transfer fees was unchanged, at approximately 5 percent.

Overdraft fees are a big source of fee income for banks, the report notes. Banks collected an estimated $16.7 billion in such penalties in 2011, at least $6 billion of that brought in by debit card use.

Young adults and lower-income and nonwhite Americans are more likely to be charged overdraft fees. Those with a credit card, however, are much less likely to pay the fees, the report found.

The report is based on a December telephone survey of more than 1,800 people by Social Science Research Solutions. The survey included people who had been charged overdraft and transfer fees, as well as people who had transactions declined and those who had never overdrawn. The margin of sampling error is plus or minus 2 percentage points.

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