New rule on overdraft fees

Thursday, July 01, 2010

New federal rules give you the choice to avoid overdraft fees on certain debit card transactions and ATM withdrawals by stopping banks from approving these transactions when you do not have enough money in your bank account.

If you do not have sufficient funds in your account to cover a payment, it is called an overdraft. Many banks will pay the overdraft and charge you a fee. This is called “courtesy overdraft coverage.”

As of July 1 (new accounts) and Aug. 15 (existing accounts), your bank must have your permission before it can charge a fee to cover an overdraft if you do not have enough money in your account to pay for the transaction. Giving your bank permission to pay overdrafts on debit card transactions and ATM withdrawals is called “opting in.”

If you do not opt in, and you do not have enough money in your bank account, these transactions will be denied.

Some banks also charge a second overdraft fee if the overdraft and the fee are not paid back in a few days. And at your next deposit, the banks automatically help themselves to the money you owe.

Consumer Action urges consumers not to opt in and not to be confused by notices from their banks. “Banks may try to get you to opt in to expensive overdrafts by using scare tactics, such as stating that your debit transactions and ATM withdrawals will be denied if you don’t have money in the bank,” said Linda Sherry of Consumer Action. “Well, hello! If you don’t have money in the bank, why would you want your bank to advance you money and then charge you $35 for each transaction it denied?”

Sherry points out there are much better alternatives for dealing with overdraft. “If you frequently fall short between paychecks, consider REAL overdraft protection.”

Unlike the “courtesy coverage” that banks offer—and want you to opt into—there are real alternatives out there. Most banks offer better, cheaper options in case you overdraw your account. For a small fee or small amount of interest, traditional bank overdraft protection plans mean that you don’t have to pay the large overdraft fees. Talk to your bank or credit union branch to find the options available to you, which may include linking your checking account with:

A savings account
A credit card
A line of credit

Each day that you need a transfer to cover overdrafts, the bank will automatically transfer money to your account. You may pay a $5 to $10 fee to cover the transfer—but you will not be hit with hefty overdraft fees. If you link your account to a credit card or a line of credit, you will be charged some interest for the transfer, until you pay it back.

New overdraft rules

The new overdraft rules were written by the Federal Reserve. The rules:

Prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.
Allow banks to charge overdraft fees for checks or recurring debits when there are insufficient funds in the consumer’s bank account—even without a consumer’s opt in. In other words, you can still be charged per-item fees for “non sufficient funds” (NSF) checks or automatic bill payments. On average these fees are $35 each, and multiple fees can be charged each day depending on how many transactions apply to a negative balance. This is because the Federal Reserve’s testing showed that most consumers want overdraft services to cover important or recurring bills (such as checks to pay rent, utilities, and telephone bills), and that they are willing to pay fees for this coverage.
Require that consumers must be provided a notice that explains the financial institution’s overdraft services, including all fees, and the consumer’s choices, before being given the choice to opt in.
Give you the right to opt out at any time—even if you already have opted in.
Require that you get same account terms, conditions and features, including price, as other account holders, even if you do not opt in. In other words, you cannot be discriminated against if you don’t opt in.
Are issued under Regulation E, which implements the Electronic Funds Transfer Act.
Prohibit financial institutions from associating the payment of overdrafts for checks and other transactions to whether the consumer opts into overdraft service.

Games banks play

Banks sometimes reorder your daily transactions from largest to smallest, which empties your account faster, so each subsequent charge will incur another overdraft fee. (Even if you do opt in to overdraft coverage, your bank does not guarantee to pay all overdrafts.) If your bank does pay your overdraft, you will be charged a hefty fee (on average $35) for each overdraft transaction. While some banks limit such fees to three or four per day, this can add up to a large sum (for example, $35 fee X 3 transactions = $105 in fees in one day). It’s important to remember that opting in to payment of one-time debit and ATM withdrawal overdrafts does not mean that you will have an affordable repayment schedule. The money that the bank advanced, as well as the fees, must be paid in a few days, or you may be charged another fee. Any money you owe will be “grabbed” from your account by the bank when your next deposit is made.

Tips for tracking your balance

When you use your debit card, enter the amount in your checkbook register and subtract it from your existing balance.
Reconcile your bank account at regular intervals, and check your balance online if you have Internet access, by setting up online access with your bank.
Keep a cushion of extra money in your checking account in case you forget you made a transaction, made a mistake, or have a deposit delayed.
Sign up for email or text alerts from your bank to warn you if your balance is running low.
Check your account balance by calling your bank in advance.
Check your balance at your bank’s ATMs for free before you make a withdrawal.