New Checking Account Overdraft Rules Now in Effect

August 16, 2010
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Some Americans may be surprised by new changes in their checking accounts.

Overdraft protection is no longer available for checking account customers unless they “opted in” for this service. The new Federal Reserve rules started yesterday.

Before these new Federal Reserve rules took effect, most banks automatically added courtesy overdraft protection to checking accounts, providing the details and fees in the fine print. Some customers didn’t realize the high price of the fee until they incurred the charge.

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.

If you did not opt in, your bank’s standard overdraft practices no longer apply to your everyday debit card and ATM transactions. These transactions typically will be declined when you don’t have enough money in your account, but you will not be charged overdraft fees.

The new rules don’t lock you to your choice forever; you can still make changes to your account. You can choose to opt in or out of overdraft protection at any time.

The rules are good for consumers, but will reduce revenue for banks. Some banks will try to persuade customers to choose the “benefits” of overdraft protection since banks are anxious to hold on to as much fee income as they can.

“This is a good time to sign up for free online alerts offered by most issuers. You can get a daily text or email that tells you the balance in your account. Knowing the amount of money in your checking account can help you avoid the embarrassment of a declined purchase,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.

The new 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. If you do not want your bank’s standard overdraft practices in these instances, talk to your bank; they may give you the option to cancel.

Statistics on how many people have opted for overdraft protection are not yet available. A July poll conducted on the National Foundation for Credit Counseling website found that that 26% of 2,089 respondents intended to opt in for overdraft protection.

If you are interested in the overdraft protection, be sure to carefully read the fine print to understand its costs and limitations. The cost of an overdraft may not end with the NSF paid-item fee. If your account remains overdrawn, you might incur additional fees. Secondly, transactions are not necessarily processed in the order they occur so banks can charge the items to your account in any order they choose. Finally, even if you choose to opt-in, the payment of an item is discretionary. Banks will choose which transactions to cover so a consumer can’t always can’t count on having overdraft protection when you need it.

Your bank may offer less expensive alternatives to overdraft protection.

Some banks allow you to create a link to your credit card, savings account or line of credit that will fund overdrawn transactions. There is a fee for each transaction, but it is typically $5-$10, much less than the overdraft protection. You must contact your bank to set up this alternative service, since it is not part of the opt in selection.

LowCards.com ( http://www.lowcards.com ) simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index ( http://www.lowcards.com/CreditCardIndex.aspx ) is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for over 1000 credit cards offered in this country.

Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for ten years.

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4 Responses to New Checking Account Overdraft Rules Now in Effect

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