Not all overdraft protection programs are the same. On the surface, it may read like traditional banks are helping you fill financial gaps, but a deeper dive into fine print might prove otherwise. We’re sharing an overview of how One’s overdraft program compares to traditional overdraft protection programs, as well as uncovering how traditional banks utilize overdraft fees to create a major source of revenue.
What does it mean to overdraft, and how does it work?
An account will “overdraft” when a transaction is more than the available account balance. Example: You’re buying groceries, and the total is $150, but your current account balance is $140. If you’re enrolled in a traditional overdraft protection program, your account will be overdrafted by $10. The bank is fronting the $10, so you can cover the total transaction purchase. You might not have been aware that the $10 loaned to cover your transaction has a daily fee attached to it.
The most common ways a traditional bank account can go negative that triggers an overdraft fee are:
- Paper checks that are deposited later than expected without available funds
- Recurring payments that deduct before additional funds are available
- ATM or debit transactions that were approved without available funds
Overdraft protection is a revenue generator but not for One
A recently published Brookings study has revealed that overdraft fees accounted for more than 50% of 6 well-known banks’ net income. Overdraft fees have become an enormous revenue driver but at the expense of a small group of people who bear the burden. The research found that the 9% of people who overdraw their bank accounts more than 10 times per year pay a whopping 80% of total overdraft fees collected. The average person in that same group pays around $380 in overdraft fees per year. An important note is this is not a random one-year revenue spike; this income source is built into their business model.
Overdraft Fees as a Percentage of Profit
Americans paid $34 billion in overdraft fees in 2017.
The CFPB (Consumer Financial Protection Bureau) released a detailed report explaining the impact of this money-making service. By one estimate, traditional banks and credit unions generated $34 billion in overdraft fees in a single year. The study also found that most fees incurred were on transactions of $24 or less, and the majority of debt accrued was repaid within 3 days. To put this into a loan example, a person charged a $34 fee which takes 3 days to repay, would be borrowing the “loan” at 17,000% APR (annual percentage rate). Of course, no one would willingly borrow or loan at such a high rate, but this example shows the significant costs associated with one small overdraft.
“Despite recent regulatory and industry changes, overdrafts continue to impose high costs on consumers who have low account balances and no cushion for error. Overdraft fees should not be ‘gotchas’ when people use their debit cards,” said CFPB Director Richard Cordray.
The true cost of overdraft protection
Overdraft protection can help avoid embarrassment and the hassle of declined purchases but don’t be fooled into thinking your traditional bank is lending a free helping hand when you’re in a financial pinch. This on-the-spot cash usually comes with hefty, daily fees that can quickly balloon into a total costing more than the original amounts.
A quick run of errands can start racking up fees fast. You could unknowingly be dipping below zero, especially if your current bank doesn’t support real-time notifications.
$2.50 parking meter
$11.25 total purchases
$35 overdraft fee
$35 overdraft fee
$35 overdraft fee
$105 total daily fees*
Over $100+ of overdraft fees were charged in a single day to cover under $15 of purchases.
*Rates and daily limits vary from bank to bank, so please read carefully when opting into any Overdraft Protection Program.
One versus other overdraft protection programs
What is Credit Line? How is it different?
One offers a Credit Line that’s a built-in safety net for your finances. It’s an optional feature to help you access extra money if you need it without being penalized. Creating and maintaining a budget will help steer you clear of dipping below zero, but life happens, so there’s bound to be some unplanned or above budget purchases along the way. It can help fill in a financial gap or help you to avoid using high-interest debt through traditional credit cards. The biggest difference between a traditional Overdraft Protection Program and Credit Line is that you’re not hit with multiple per-transaction fees; in fact, you aren’t hit with any overdraft fees. And that’s why One was named NerdWallet’s Best Checking Account with Overdraft Fee Avoidance in 2021.
Accessing a low APR line of credit at One is better than holding a credit card balance.
You’ll be able to borrow up to your Credit Line balance limit (located within your Spend Pocket). If you repay the borrowed balance within the month you borrowed, you won’t pay interest! If you choose to carry a balance into the next month, you’ll pay 1.00% per month (12% APR). APR (annual percentage rate) is the fee amount you pay each year to borrow money shown as a percentage.
If you’d rather have your transactions declined, keep Credit Line toggled off in your account.
Did you know that you can increase your Credit Line? If you’re looking for more wiggle room in your finances, adding a qualifying paycheck direct deposit can help increase your available credit.
We’re here to help you not just to get by but to get ahead. Make the switch today and keep more money in your Pockets while getting life done.
Your financial well-being is our mission.
Katie is a tech and finance writer, covering stories from building better financial health to credit cards. They are currently based in Sacramento, CA with their puppy Ollie and cat Bagel.