According to the Consumer Financial Protection Bureau (CFPB), junk fees often hide the actual cost of a product or service since they aren’t disclosed upfront. This lack of clarity makes it harder for consumers to price shop and find the best deal for their money.
Definition and Example of Junk Fees
Junk fees are fees charged by financial institutions that are often excessive or unexpected. Many times, it’s unclear to consumers why these fees are being charged in the first place. Companies often fail to disclose these fees upfront, making it harder for consumers to understand the actual cost of a product or service. An excellent example of this is fees charged by some hotels and resorts. When you book a hotel room, you’re probably quoted a nightly charge for the hotel room. But some hotels will add on daily “resort fees” and, ins some cases, parking fees, that weren’t included in their original estimates. These types of hidden charges often exceed the true cost of the product or service. That’s why the CFPB launched an initiative to crack down on costly junk fees.
How Junk Fees Works
When you pay for a product or service, it’s normal to shop around and compare your options with different companies. But there’s one problem: Many companies tack on additional junk fees that disguise the actual cost of that product or service. For example, junk fees are often added when you close on a mortgage. Mortgage closing costs are a percentage of the total loan amount and include taxes, discount points to lower the interest rate, and origination fees. These extra fees make it more expensive to buy a home and can cut into your equity. However, there are certain limits put on mortgage lenders. Assuming there is no change in your financial circumstances, certain fees can’t increase more than 10% at closing.
Types of Junk Fees
There are several junk fees you may encounter when using a financial product or service.
Mortgage Fees
Mortgage junk fees are additional charges that aren’t disclosed upfront when you’re shopping around for different lenders. Instead, these fees are added on at closing and are often considered unexpected and excessive. Here are some standard mortgage junk fees you can expect to see in your closing costs:
Application feeUnderwriting feeCourier feeProcessing feeAdministrative fee
Account Fees
In 2019, banks made over $19 billion annually on overdraft fees. Fewer than 9% of consumers pay 10 or more overdraft fees per year, yet they account for 80% of all the revenue earned from overdraft fees. Overdraft fees are just one of many you can expect to encounter when opening a deposit account. Other common junk fees charged by banks include late fees, minimum balance fees, and account maintenance fees.
Prepaid Card Fees
Consumers without bank accounts often rely on prepaid cards to pay their bills and meet everyday financial obligations. Many financial institutions charge additional fees for using the card, and these fees aren’t always advertised upfront. Common prepaid card fees include:
Monthly feeTransaction feeInactivity feeOut-of-network ATM fee
Credit Card Fees
In addition to paying high interest rates, credit card users often get hit with additional junk fees such as annual fees, transaction fees, and late fees. In 2020, credit card users paid $20.8 billion in credit card fees, which was down slightly thanks to pandemic-related fee waivers.
