An overdraft occurs when you make a purchase or transaction that takes your account into a negative balance.

You may overdraft on you checking account when you write a check, make a debit card purchase, or commit any transaction that pulls too much money from your account.

Typically, banks and credit unions will treat overdrafts with one of three methods: No Protection, Overdraft Forgiveness or Overdraft Protection.

No Protection (Opting Out)

Not all institutions allow your balance to go negative, but banks and credit unions will still charge you a fee when you attempt to overdraft on your account. When you overdraft by check, the institution rejects the check and charges you a fee. This overdraft fee is called an “Insufficient Funds Fee” (NSF for short) or “Returned Item Fee” and usually runs from $10 to $35.

Recent legislation requires your institution to reject overdraft-inducing debit card purchases by default unless you opt into an Overdraft Forgiveness or Overdraft Protection program.

Overdraft Forgiveness

When you sign up for the overdraft forgiveness method, your financial institution will pay for purchases that take your account into a negative balance. While this prevents your checks from bouncing, you are still charged the full insufficient funds fee.

In addition, some institutions charge customers for keeping a negative balance for too long. Overdraft forgiveness applies to both checks and debit card purchases, and goes by many names, including “Overdraft Courtesy.”

Overdraft Protection

Overdraft Protection is a ‘safety net’ that helps you avoid large fees and penalties when you spend more money than you have in your checking account.

Instead of the bank or credit union paying the difference with its own funds when you overdraft, the bank transfers funds from a different account you own and have designated the ‘protecting’ or ‘sweep’ account.

Most institutions offer some form of overdraft protection, either through an alternative deposit account or through a credit line.

Overdraft Practices

Research conducted by Pew Charitable Trusts shows that when it comes to overdraft programs 84% of credit union and banks default to having debit and ATM overdrafts declined, an increase from 47% in 2013.

Additionally, the non-profit research group reported that there has been a slight decline in the practice of transaction reordering.  This practice involves financial institutions processing transactions from the highest amount to the lowest in order to maximize overdraft fees.

Pew reported on 32 of the largest banks in 2015, finding that 56% of them do not reorder transactions compared to 41% in 2013.

Overdraft Fee Class Action Lawsuit Investigation

Since July 1, 2010, credit unions and banks are required to ask new customers if they wish to opt in to overdraft protection. There is no legislation regarding how much money can be charged for overdraft fees and many consumers are not aware of their options when it comes to overdraft.

According to the Consumer Financial Protection Bureau, some consumers who opt in to an overdraft program may pay more than seven times as much in overdraft fees.

An overdraft fee class action investigation has been launched in response to consumer reports that many of these financial institutions have unfair overdraft fee practices. Some of the banks and credit unions being investigated include State Employees Credit Union and Pentagon Federal Credit Union.

Consumers who suspect they are being charged improper credit union overdraft fees may want to consider speaking with an attorney, who can help determine if the charges were proper or improper and advise about possibly bringing a credit union overdraft fee lawsuit.

ATTORNEY ADVERTISING

The choice of a lawyer is an important decision and should not be based solely on advertisements.