Discussion Paper

Learning by Bouncing: Overdraft Experience and Salience

Abstract: Overdraft credit, when banks and credit unions allow customers to spend more than their checking account holds, has many critics. One fundamental concern is whether overdrafts are salient—whether account holders know how often they overdraw and how much it costs them. To shed light on this question, we asked participants in the New York Fed’s Survey of Consumer Expectations about their experience with and knowledge of their banks’ overdraft programs. The large majority knew how often they overdrew their account and by how much. Their overdraft experience, we find, begets knowledge; of respondents who overdrew their account in the previous year, 84 percent knew the fee they were charged, roughly twice the share for other respondents. However, even experienced overdrafters were relatively unaware of other overdraft terms and practices, such as the maximum overdraft allowed or whether their financial institution processed larger transactions first.

Keywords: overdraft; bounced checks; salience; regulation;

JEL Classification: D1; G21; G5;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2024-04-01

Number: 20240401