New rules for overdraft fees on debit cards may lead to more 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.
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