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Americans are spending a lot less on overdraft fees, but it still adds up to billions

April 28, 2022, 12:01 PM UTC

American households spent nearly $11 billion on overdraft charges last year, a cost that the Consumer Financial Protection Bureau has labeled a “junk fee.”

That number might seem staggering, but it’s actually a lot less than consumers used to pay pre-pandemic, according to the Financial Health Network’s FinHealth Spend Report 2022 released Thursday.

Overall, Americans spent $305 billion on interest and fees related to financial products such as outstanding student loans, car loans, credit card balances, overdraft charges, payday loan expenses, and insurance products. That’s down from the $319 billion Americans spent in 2020.

And it’s actually the first time in about a decade that there’s been a sizable drop in this type of spending. “We saw this rare dip in consumer spending this year,” Meghan Greene, director of research at the Financial Health Network, tells Fortune. This was largely driven by the pause in federal student loan interest and payments, as well as a decline in consumer credit card balances, she says. “The government’s support through stimulus [payments] and other another aides really assisted there.”

Typically Americans get hit with overdraft or non-sufficient funds (NSF) fees when they overdraw their checking account with a purchase or recurring charge like a rent or bill payment. Since there’s not enough money in their account, their bank will temporarily cover the shortfall and charge them a fee to do so, usually $30 to $35 per overdraft. It’s essentially a short-term form of credit—and many consumers do take advantage of it. 

Some banks do offer more consumer protections around these types of fees, such as capping the number of overdrafts they charge per day, providing a grace period to make up the difference, or even waiving overdraft fees on small purchases under $5. 

But many Americans still get caught unaware, and there’s been a lot of complaints from consumers about banks reshuffling the order of multiple transactions made in a single day, so larger purchases are put through first (potentially draining an account balance faster and racking up more fees). Others claim there are not adequate bank overdraft notifications

“Large banks haul in huge sums in fees from retail customers,” CFPB Director Rohit Chopra said earlier this year. “Junk fees often act as penalties, like with non-sufficient funds and credit card late fees, rather than compensation for a legitimate service.”

The CFPB launched a broad review of fees charged by banks, credit unions, and other financial companies in January, asking the public to weigh in as well. The inquiry will help the agency craft rules, issue industry guidance, and focus supervision and enforcement resources to curb the excessive levying of these fees. 

Overdraft fees tend to fall primarily on lower-income and minority Americans who can't afford them. Among households with bank accounts, Black consumers were 1.8 times more likely to overdraft at least once in 2021 than similarly-situated white Americans, according to the report. Latinx households were 1.4 times more likely to pay at least one overdraft fee.

Financially vulnerable households—those who struggle to spend, save, manage debt, and plan out their finances—were 10 times more likely to pay an overdraft fee compared to financially stable consumers.

"Black households, Latinx households, and low-income households are spending a greater proportion of their income on financial services, which speaks to a number of systemic factors, [including] a lack of access to affordable credit," Greene says.

Yet overdraft spending leveled off during the pandemic, likely due to Americans’ increased savings thanks in part to federal programs like stimulus checks and advanced child tax credit payments. But changes in banks' policies may also have played a role.

In the last two years, several major banks announced emergency pandemic waiver programs or overhauled their overdraft fee programs entirely. Last year, for example, Alliant Credit Union, Ally Bank, and Capital One all announced they would abolish overdraft fees. Starting this summer, Citibank will eliminate all its overdraft fees. Bank of America will lower its overdraft fees from $35 to $10 starting in May. Meanwhile Wells Fargo cut NSF fees and implemented other limits on overdraft charges. 

If this trend continues, that could mean lower overdraft spending in 2022 as well. "I would anticipate that given the volume of changes in bank policies, we may see a continued decline in this," Greene says.

For consumers who do want to cut back their spending on overdraft fees, you can typically opt out of overdraft protection so that if your account balance is zero when you make a purchase, the transaction will simply be declined. Keep in mind that banks could still charge NSF fees on things like returned checks. 

Concerned consumers can also switch to a bank or an account that doesn’t levy these charges. In addition to the banks that have recently cut these fees, some banks offer checking accounts without monthly fees or overdraft fees, including Key Bank’s Hassle-Free Account and Discover Bank’s checking account

How spending on financial services will shape up this year is difficult to predict, Greene says, noting that there are a lot of changing dynamics that could affect American households. Not only have federal stimulus programs ended, but the student loan moratorium is set to expire in August and inflation and interest rates continue to rise.

"There's a number of high level trends at play that's going to be impacting overall spending in 2022," Greene says.

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