Consumers generally have three choices when they have insufficient funds to cover a debit card purchase or ATM withdrawal. They can incur a) an overdraft penalty fee (median cost $35) in which the bank makes a short-term advance to cover the transaction; b) an overdraft transfer fee (median cost $10) when the bank transfers funds from a linked account like a savings account, line of credit, or credit card; or, c) if the consumer did not opt in to an overdraft penalty plan and did not apply for an overdraft transfer plan, the transaction will be denied with no fees charged.
A survey of consumers, commissioned by Pew’s Safe Checking in the Electronic Age Project, found that although almost one-fifth (18 percent) of consumers have incurred an overdraft penalty fee in the last year, their understanding of overdraft rules is weak. More than one-third of respondents surveyed were not aware their bank offered overdraft coverage until they incurred a penalty, and many also did not know about the tactics banks use that increase costs to consumers, such as reordering deposits and withdrawals. Lower-income and younger consumers are hit the hardest by these penalty fees.