If you have a checking account, you now have a choice to make about
overdraft protection. New Federal Reserve rules require banks to
receive permission from each checking account customer before the bank
provides overdraft protection for ATM and debit card transactions.
The change started July 1 for new customers and takes effect on
Aug. 13 for existing customers. The rules do not cover checks or
automatic bill payments--banks can still authorize and pay overdrafts
for these transactions at their discretion and charge a fee.
An overdraft occurs when one does not have enough money in a checking
account to pay for a transaction, but it is paid by the bank anyway. This
service is a loan from the bank and it isn't free. Banks charge a
non-sufficient funds paid item fee (NSF) that is typically $30-$40.
A fee is charged for each transaction paid in this manner.
Before the new rules, most banks automatically added courtesy overdraft
protection to checking accounts with details and fees in the fine print. Some
customers didn't realize the high price of the fee until they incurred the charge.
Now that the rules are in effect, banks are aggressively encouraging their
customers to opt-in and marketing the benefits of overdraft protection. This
is revenue banks do not want to lose. In 2009, banks collected almost $38.5
billion in insufficient funds and overdraft fees, Moebs Services estimates.
Banks have made a lot of money by allowing customers to spend or withdraw
money that was not in their account. An overdrawn account can happen quickly
with multiple transactions, even if they are small amounts.
"Sometimes, overdrafts can be caused by a number of things that are not in the
consumer's control: the timing of cash flow or payments, the delayed
posting of a deposit, or the banks paying the biggest withdrawals first.
A $5 purchase can trigger a $30-40 fee. Since the cashier doesn't tell you it's
an overdraft, you don't know there is a problem until it is too late."
In response to the new regulations, Bank of America and Citi no longer allow
debit card overdrafts. Bank of America customers can still sign up for a
formal program to cover debit card overdrafts.
How to Opt Out of Overdraft Protection (or Opt In)
Many banks are currently sending out informational letters to customers that
explain overdraft protection and how to enroll in the service. A consumer
can mail in the enrollment form (the letter may include a postage-paid
envelope), or sign up by phone, in person at your local branch or online.
If you do not choose an option by August 13, you will automatically be opted out.
Opting out means that you do not want your bank to authorize and pay for
debit card and ATM transactions when it appears there is not enough money in
your account to cover the transaction. This may create a situation where
your purchase is declined.
Opting in means that you do want your bank to cover debit card and ATM
transactions when there may not be enough money in your account to cover the
transaction. As a result, you will be charged an NSF paid item fee.
Read the Fine Print
Carefully read the notice that you receive from your bank. It should
reveal the true costs and limits of overdraft protection.
* The cost of overdraft may not end with the NSF paid-item fee. If your account
remains overdrawn, you can receive additional fees. For example, if your
account is overdrawn and continues with a negative balance for ten
consecutive days, BBVA Compass charges a $25 extended overdraft fee. If the
ending daily balance remains negative for 20 calendar days, another $25
extended overdraft fee will be charged. The BBVA Compass limits NSF fees
to six per calendar day. The total of the negative balances and all fees and
charges is due immediately.
* Transactions aren't processed in the order they occur. Banks can charge
the items to your account in any order. They admit in the fine print that
this can cause the available balance to be insufficient to pay one of more
other items that otherwise could have been paid. This means the order the
charges are paid can affect the total amount of overdraft and non-sufficient
funds fees.
* Even if you choose to opt-in, the payment of an item is discretionary.
Banks will choose which transactions to cover. You can't count on having
overdraft protection when you need it.
If you opt in, you can cancel at any time. If you do not opt in, you can do
so later.
Alternatives to a Standard Overdraft
Most banks offer cheaper alternatives to standard overdraft protection.
These include a link to your savings account, a credit card, or a line of
credit that will cover overdrawn transactions. There is still a fee each
time you overdraw your account and your bank performs a transfer but it is
typically $5-$10, much less than the standard overdraft fee. You must
contact your bank to set up this alternative service, since it is not part
of the opt in selection.
This is a good time to assess how you monitor checking account. Set up a
low balance alert that will notify you when your account is low. Online
banking you can help avoid overdraft situations and help keep up with your
account in real time.
