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Have you ever had to pay an overdraft penalty? You're far from alone if you have incurred such a fee, according to a survey of consumers commissioned by Pew's Safe Checking in the Electronic Age project. In Overdraft America: Confusion and Concerns about Bank Practices, the Pew survey found that about one-fifth (18 percent) of consumers were hit with an overdraft penalty fee in the past year.

As you can see from the chart, almost three-quarters of those with an overdraft incurred a penalty fee. The typical penalty is $35. 

The study reports that the overdraft rules are poorly understood. Two groups in particular run into trouble: the young and low-income consumers. As the father of two young adults, I'm not surprised about younger people getting hit with chanrges. Both ended up learning the hard way about overdrawing their checking accounts. But they learned.

 

Consumers under the age of 44 are nearly twice as likely to incur an overdraft penalty compared to those 44 and older.

Consumers making less than $30,00 a year are twice as likely to get a penalty than those making more than that sum -- 20 percent vs. 10 percent.  

I find it interesting that 75 percent of those surveyed would prefer having a transaction declined if there isn't enough money in the account, rather than get socked with a penalty. One-third of respondents said they closed their checking accounts because of overdraft fees. The Pew policy folks make a number of sensible recommendations:


  • Provide accountholders with clear, comprehensive and uniform pricing information for all available overdraft options.

  • Make overdraft penalty fees reasonable and proportional to the bank's costs in covering the overdraft.

  • Stop the process of reordering transactions to maximize fees, and post deposits and withdrawals in a fully disclosed, objective and neutral manner.      

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Follow Chris Farrell at @cfarrellecon