purchases being declined at the register, but when it comes to consumer
protections, it gives consumers the option to avoid paying exorbitant
overdraft fees that many banks typically charge.
As recently as
2004, most banks simply would not allow consumers to overdraw their
accounts. If you tried to use your debit card to buy something that cost
more than your checking account's balance, too bad. The purchase was denied, and
that was that. But as we've learned, the alternative may be worse.
What
changed? Banks realized how much money they could make by allowing
consumers to withdraw more money than they had in their accounts,
charging them big fees every time they did it. According to the Center for
Responsible Lending, last year, the average overdraft fee was $34, while
the average transaction that placed consumers over the limit was just
$17. (That often works out to an equivalent interest rate of 200% or
more since most borrowers make up the shortfall within a few
days). If you overdraw two or three times before you realize it, a new
fee applies each time.
More notice, more choice
Last year, America's banks made $20
billion on overdrawn debit card purchases and ATM withdrawals alone (not
including overdrawn checks and other fees). It's a staggering amount,
especially when one considers that 2009 was the worst year for the
economy since the Great Depression, a year when millions of Americans
lost their homes to foreclosure and their jobs to the recession.
Finally,
the Federal Reserve is changing the rules regarding overdraft fees.
Unfortunately, banks will still be allowed to charge them, and the rules
do not set a ceiling for the maximum overdraft fee banks can charge.
But the Fed's new rules may help consumers avoid fees by giving them
more notice and more choice.
Many banks (and some credit unions)
automatically enroll customers opening new checking accounts in standard
overdraft protection programs which carry hefty fees for each
transaction that exceeds the available funds in the account. In most
cases, customers were not clearly warned about these fees, nor were they
given the chance to opt out.
The new rules change that. A bank cannot
charge overdraft fees on debit card and ATM transactions until they
first inform customers about the overdraft protection program and the
customer agrees to participate and pay the fees.
What happens if
you don't opt in for overdraft protection? Just like the good old days:
Nothing. The bank will simply deny any debit card purchase that
overdraws your account. It may be embarrassing, but at least it will
stop you from taking out a 200-plus percent loan. If you decide later
that you want overdraft protection, you can opt-in at any time. If you
get overdraft protection, and then no longer want it, you can opt-out at any
time. Banks are not allowed to charge a fee for opting out.
The
opt-in rule applies to new accounts as of July 1, 2010. They apply to
existing accounts as of Aug. 1.
There are some important
exceptions to the new rules. Many people pay monthly bills like their
rent, mortgage or utilities using automatic withdrawals from their
checking accounts. Banks do not have to ask your permission before
charging you overdraft fees for these types of withdrawals, and they can
charge as much as they want. Some banks may let consumers out of
over-draft protection on these transactions, but consumers have to ask
first.
Checks are the other big exception to the rules. If you
write a check for more money than you have in your account, banks can
charge whatever fees they like.
However…
Banking
industry advocates say the rule goes too far.
"I would suspect
that many community banks will simply stop offering overdraft protection
to avoid the costs and penalties of complying with the rule," Camden R.
Fine, president of the Independent Community Bankers of America, told the
New York Times.
It's about time they did stop, say consumer
advocates, who don't like the loopholes for checks and automatic
withdrawals.
"Some of the time, protection is never as good as
round-the-clock protection," Ed Mierzwinski, director of the consumer
program for the United States Public Interest Research Group, told the
Times.
Tips:
- Think before you
act. Many banks are already trying to convince consumers to
sign up for overdraft protection. These programs can be important for
some consumers who may be living paycheck to paycheck and use their
debit cards to buy necessary items, like important prescriptions, that
they cannot live without. But for most consumers, overdraft protection
is often unnecessary. If you can live without this protection, don't pay
the fee.
- Ask questions. Always ask to
see your bank's policy for overdraft and other fees in writing. If you
notice new fees on your monthly statement that are not mentioned in your
account agreement, contact your bank immediately.
- Watch
for holds. Rental car companies, hotels, and even gas stations
may place a hold on your debit card for the anticipated amount of the
bill. Depending on how much money you have, this can freeze your entire
account. The hold typically is not removed until several hours or a
couple of days after the final transaction is processed. Consider using
a credit card
for these types of transactions instead.
- Watch
for fraud. Many accounts are overdrawn because an identity
thief uses a stolen debit card to make a purchase or an ATM withdrawal.
Sign up with your bank to monitor your account online; find out whether
you can setup text or email alerts if your balance falls below a certain
amount; and pay close attention to your monthly statements. The sooner
you spot fraud, the easier it will be to stop it, and the fewer fees you
may have to pay.
