Americans whose incomes were affected by the coronavirus pandemic paid more overdraft fees than those who were not financially affected by COVID-19. People of color, for example, pay more than twice the amount of bank fees as white Americans, according to a recent Bankrate poll.
But some banks, like Detroit-based Ally Bank, America’s largest digital bank, cited the impact of overdraft fees on black and Latino households, who are historically poorer than their white counterparts and are more often affected by these fees. Overdraft fees are what a bank charges each time a customer withdraws more money from their account than they have.
It’s also a common reason why black and Latino households choose not to be banked or live without a bank account in order to avoid the fees that often come with them.
Ally Financial announced last week that it would eliminate overdraft fees for all of its banking products, making it the first major bank to end these fees for all of its operations. The main reason for eliminating the fee was how expensive it was for low-income people, Ally said.
►Overdraft fees:Ally Bank ends it, first major bank to do so
A spending boom? :Low-income Americans feel left behind
“Nationally, over 80% of overdraft fees are paid by consumers living paycheck to paycheck or with consistently low balances – precisely the people who need help stabilizing their finances. “Jeffrey Brown, CEO of Ally Financial, said in a statement.
Ally did not charge a significant overdraft fee compared to other banks. The most Ally charged each client for overdrafting an account was $ 25 per day, instead of per transaction. Ally doesn’t expect the end of the overdraft fee to have a major impact on the company’s earnings forecast for the full year.
“This will certainly appeal to the younger, lower-income households who are more prone to overdrafts, for whom this is a significant problem,” said Greg McBride, chief financial analyst for Bankrate.com. “Some banks are willing to bypass certain revenues to build and build relationships with consumers.”
Overdraft fees can be a big expense, especially for low-income households. The fees cost Americans $ 12.4 billion in 2020, according to the Financial Health Network, a data analytics company.
Overdraft fees vary from bank to bank, averaging $ 33.47, according to Bankrate’s 2020 Checking Account and ATM Fees Study.
But don’t expect all banks to drop short-term overdraft fees, McBride said. These fees remain an important source of income for many banks, he added.
Financial firms generated about $ 31.3 billion in consumer overdraft revenue in 2020, according to financial data firm Moebs Services.
“More and more online banks are moving in this direction and larger, more traditional physical banks have relaxed their stance,” McBride said, “they won’t be eliminating overdraft fees anytime soon.”
JPMorgan Chase, for example, raised the most revenue, making nearly $ 1.5 billion in overdraft fees, according to Bloomberg, although the bank said it removed the fees for customers affected by COVID-19.
Low-income households feel the pain
According to FinHealth’s latest spending report, the costs associated with overdraft fees have hit low- and moderate-income Americans the most, including black Americans and Latinos. Black households with current accounts are 1.9 times more likely to have an overdraft than white households, while Latinos were 1.4 times more likely than white households.
Forty-three percent of “vulnerable households” with current accounts, or those who find it difficult to spend, save, borrow and plan, report having overdrafted their accounts in the past year, with 9.6 discovered on average.
“Overdraft fees have become a form of quicksand for low-income households who live paycheck to paycheck,” McBride said.
How to avoid overdraft fees
Overdraft fees can be avoided if you take some precautions.
1. Subscribe to overdraft protection
With overdraft protection, the bank will transfer money from one of your other accounts to cover an overdraft amount.
2. Sign up for bank alerts
Set up an alert to notify you when your account balance drops below a certain amount. It’s a simple way to avoid unexpected overdrafts and save costs.
3. Try to get the overdraft fee waiver
If you are charged an overdraft fee, it does not always mean you have to pay it. It doesn’t hurt to negotiate to try and get reimbursed for the costs. Make sure to call. There is no guarantee that this will work, but you can call and ask the bank to remove the charge from your account.
Contribution: The Associated Press