GOBankingRates

Study: A Single Overdraft Can Cost You up to 145% of Your Yearly Interest

With deposit interest rates still at dismal lows, concern about excessive checking account fees remains prevalent.

According to American Banker, depositors who overdraft pay an average of $225 a year in fees, seriously hampering their chances at remaining in the banking system altogether.

Unfortunately, despite the widespread practice of charging overdraft fees, customers are seeing less of a return in the form of checking account rates. In its latest study, GOBankingRates compared the cost of overdraft fees against 2,781 checking account interest rates today, in order to determine the real return that depositors can expect to earn.

Highest Checking Account Rates by State

updated 2 state average apy

 Checking Account Return by Institution Type

On the national level, average checking account rates stand at 0.27% APY. Bank deposit rates for checking accounts average 0.26% APY, while credit unions continue to demonstrate their ability to offer depositors higher average checking account returns, with rates at 0.32% APY.

When compared to national median overdraft fees, however, the disproportion of potential earnings versus fees is apparent.

checking account return by institution

According to a 2013 study on overdraft price hikes by Moebs $ervices, the national median overdraft fee stands at $30. Median bank overdraft fees are also $30, while credit unions remain competitive with median overdraft fees for the year at a slightly lower $28.

But just one overdraft can easily reverse customers’ returns. Our investigation revealed that one overdraft in the course of a year equals 111.11 percent of a depositor’s annual return, meaning that one misstep can not only jeopardize interest earnings, but also cut into principal deposits.

When broken down, the findings for banks and credit unions are just as eye-opening. A single bank overdraft fee costs customers 115.38 percent of their yearly return, while credit union members absorb a loss of 87.50 percent with just one overdraft charge.

Related: How to Get Overdraft Fees Waived

Best Regional Checking Account Returns

checking account return by region

Regionally, the Midwest provides the most palatable ratio when it comes to comparing potential checking account interest returns with average overdraft fee amounts.

Though banks and credit unions in the Midwest charge a hefty $29 overdraft fee on average (according to the study by Moebs $ervices), average checking account rates of 0.30% APY — the highest average by region — balance out the losses of an overdraft. Depositors in the Midwest lose only 96.67 percent of their returns.

In contrast, the West — which charges the same average $29 overdraft fee, per Moebs $ervices — drains depositor returns the worst, mainly due to its lower average checking account rate of 0.20% APY. This seemingly insignificant rate deduction of 0.10% APY between the Midwest and West regions results in the West having the poorest percentage of returns after an overdraft fee, with a cost of 145.00% in earnings.

checking account fees and rates

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Sources: GoBankingRates.com, Moebs $ervices (Moebs.com) and Informa Research Services, Inc. (www.informars.com). Although the information has been obtained from the various financial institutions, the accuracy cannot be guaranteed.

All data current as of November 7, 2013. Fees and rates are subject to change at any time at the discretion of individual financial institutions. Additional terms and restrictions could apply. Please verify fees and rates before opening an account.

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  • Charles Jones

    This is really eye-opening, but let’s be honest with ourselves, no one has $10,000 deposited into their checking account. And those that do couldn’t care less about an overdraft costing them 145% of their return. Thanks for this though.

  • Evan Baxter

    Pretty amazing how (relatively) “high” some of these state’s average checking account rates are… I’m a credit union member and I thought my 0.1 rate was decent, given the state of interest rates today. Surprised by these findings! Nice to see CUs give better rates than banks though! Thanks for sharing!

  • Sly

    What’s a good alternative to a checking account, then?

    • GBR Casey

      You don’t necessarily need an alternative – having a checking account is pretty essential. What I would suggest is looking for a high-yield checking account (look to local banks and credit unions for these) so you earn more on your balance and then be diligent about tracking your spending. As long as you don’t spend more than you have, you don’t have to worry about overdraft fees!

  • AFBobBlairJr

    Very nice data! I will focus only on the APY fee of a typical overdraft about which I wrote to the Boston Globe this weekend.Many banks do not now charge for an overdraft until over $5, and some have reduce their fee (really interest) to $35 to be paid with the overdraft amount in 7 days. Remember that the APY is the Annual
    Percentage Yield, mathematically called the COMPOUND APR (not the usual
    mathematically-untrue SIMPLE INTEREST APR.) Some of you mathematically disinclined will not believe this, but here goes: That CAPR is calculated (using Excel mathematical symbols and precedences: (((35/5.01)+1)^(365/7)-1)*100 which equals the incredible, but true
    11,222,,957,808,964,000,000,000,000,000,000,000,000,000,000,000,000%.
    If you get a $2.00 cup of coffee after that, that, the Compound (CAPR) on the coffee willbe 1.1856442776677e+68. That is 69 numbers long before the % mark. No
    attorney has picked up on this egregious fee. Don’t believe?, consult a professor of graduate finance.

  • Lorraine

    This was an interesting connection I’d never considered… I try to keep savings separate so I don’t spend them and they can earn interest, but yeah — as pointed out, overdraft fees will cost me more than I’m likely to make from interest anyway.

    Just wondering, does anyone have a quick figure of how much of you monthly expenditures you should keep in checking to avoid overdrafting? 120%? 200%?