Some banks getting too greedy with big fees

We’ve all done it at some time: unwittingly written a check or used a debit card for an amount greater than what’s in our checking account.

But banks that once charged $10 or $15 to cover the overdraft may now be charging upwards of $35 – and not warning customers of the pricey new fees.

They have good reason: Overdraft fees are now a big revenue source for many banks and credit unions. In fact, for some it’s their most important source now that customers are borrowing and charging less. This year, they stand to make a record $38.5 billion from charging overdraft fees. That’s more than Americans spend on buying major appliances.

Although some banks are starting to back away from big fees on overdrafts, too many Americans are getting dinged by these stealth costs. Now several members of Congress plan to introduce legislation to address what some of them are calling consumer “rip-offs.”

Some ideas look less workable than others. Bills by Sen. Christopher Dodd, D-Conn., and Rep. Carolyn Maloney, D-N.Y., for instance, would require banks to get customers’ permission before covering an overdraft. That might work for people who are super-connected and would be able to quickly respond to, say, an e-mail from their bank. But for many people that would be inconvenient.

One good idea is to make overdraft fees proportional to the amount covered. Why charge the same $35 fee for a $5 overdraft and a $500 overdraft?

It would also make sense to require banks to sign up customers for an overdraft program – say one that automatically takes money out of a savings account or charges a credit card. Some banks make that service available free; others charge a fee every time the overdraft is covered.

Most customers who accidentally write a bad check want it covered, but they might not be aware of what bank services are available to help them avoid being charged hefty overdraft fees. Unfortunately, given the money to be made from those fees, lending institutions have little incentive to make that information readily available.

The best thing Americans can do is educate themselves. They need to find out what their bank’s policy is on overdrafts and ask about free or low-cost overdraft protection. Banks are competing fiercely for business, and customers have the power to vote with their feet if an institution is slapping them with hefty fees.

If Congress eventually passes some version of overdraft legislation, banks that got greedy will have only themselves to blame. In the meantime, consumers need to look out for themselves.