Checking Accounts Often Costly, Contain Hidden Risks

A new study reveals your checking account could be costing you a lot more than you think.

The study, from the Pew Health Group, called Hidden Risks: The Case for Safe and Transparent Checking Accounts, found that the average checking account in the U.S. has:

  • an $8.95 monthly fee,

  • an overdraft penalty fee of $35,

  • an overdraft transfer fee of $10,

  • and an extended overdraft penalty fee of $25 every seventh day the account is overdrawn.

According to estimates from Moebs Services, Americans will spend a record $38 billion in overdraft fees in 2011. "If overdraft were treated like a short-term loan with a repayment period of seven days, then the annual percentage rate, or APR, on the typical overdraft would be over 5,000 percent," the Pew study noted.

Pew based its overall findings on an analysis of 250 types of checking accounts offered by the country's top 10 banks.

In addition to its startling conclusions about high fees, Pew researchers also concluded that most checking accounts lack transparency and are overly complicated. For instance, the study found that the average checking account has 111 pages of disclosures for consumers to read through and interpret.

"Congress acted nearly two years ago and passed the Credit CARD Act of 2009, which protected credit card holders from practices deemed 'unfair' or 'deceptive'," Eleni Constantine, director of the Financial Security Portfolio at the Pew Health Group, said in a statement. "Now is the time for policy makers to further protect American families by ensuring that our checking accounts are safer, easier to use and more transparent."

Pew is the latest organization to decry the lack of transparency in checking accounts. Recently, the consumer advocacy group U.S. PIRG also highlighted major problems with disclosure in the banking industry. After a six-month study of the practices at 392 banks and credit unions, as well as 12 online banks, PIRG concluded that fewer than 40% of those institutions comply with the federal Truth in Savings Act, which requires financial entities to provide prompt disclosure of bank fees and rates.

To combat the problems it cites in the banking industry, Pew's Hidden Risks report offered five recommendations, including:

  • Requiring banks to provide information about checking account terms, conditions and fees in a concise, easy-to-read format, similar to the Schumer Box used for credit cards;

  • Directing depository institutions to provide accountholders with clear, comprehensive pricing information for all available overdraft options;

  • Requiring that overdraft penalty fees be reasonable and proportional to the bank's costs in providing the overdraft loan;

  • Making depository institutions post deposits and withdrawals in a fully disclosed, objective and neutral manner; and

  • Urging the Consumer Financial Protection Bureau to examine the prevalence of binding arbitration clauses, fee shifting provisions and "loss, costs and expenses" clauses in checking accounts, and assess whether such provisions prevent consumers from obtaining relief.

Whether policymakers act on these recommendations remains to be seen. In the meantime, your best protection as a consumer is to devote some serious time to reading and fully understanding the terms and conditions of your checking accounts.

If you encounter fees, charges or terms you don't like, it's worth trying to negotiate with your bank to reduce or eliminate those fees or terms. If the bank won't budge and you feel unfairly treated, you can always exercise your right to take your business elsewhere.

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