Overdraft fees can be a costly, unplanned expense. But there could be some relief coming to your wallet.
The Consumer Financial Protection Bureau announced a new rule Thursday that could save Americans $5 billion in overdraft fees.
The penalty can be triggered when a transaction, like a withdrawal or a transfer, causes an account balance to go negative. Low-income Americans have disproportionately borne the costs of overdraft fees charged by financial institutions.
"It's used as essentially a form of credit where you've run out of money before the end of the month," said Greg McBride, chief financial analyst at Bankrate.com. "Having that overdraft service, makes sure that the car payment gets paid or the rent gets paid. And it avoids potentially larger fees if they do not [pay it]."
Under the new rule, big banks and credit unions could opt to charge $5 for overdrafts — a drop from the average fee of around $35 per transaction — or limit the fees to cover their costs and losses.
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Banks could also treat an overdraft like any other loan, giving consumers a choice on whether to open the line of overdraft credit. Banks will be required to disclose things like interest rates. This option could be risky for consumers.
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"If you don't pay that money back in a specific period of time, that's where you could run into additional charges, interest or additional fees," said McBride. "They're willing to extend that credit for you, but you have to bring your account back into a positive balance, usually within 24 to 48 hours to avoid additional charges or fees."
Having an overdraft credit option, may send customers to other credit alternatives.
"For example, putting it on a credit card on the surface might look cheaper in terms of an annualized percentage rate. But if you're carrying a balance and not really making a lot of headway on paying that balance down, the interest charges can really grow over time, over time," explained McBride.
Dozens of banks have eliminated overdraft fees in recent years, while others have reduced their penalty from $35 to $10. Customers can also ask to waive an overdraft fee by requesting a refund with a bank agent or supervisor.
The new rule will go into effect next October, but it is expected to face legal challenges.
The Consumer Bankers Association said in a statement Thursday it was "exploring all potential options" to push back against the rule.
