Overdraft Bank Fees: How To Avoid Them With New Fed Rules

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,” says Bill Hardekopf of LowCards.com and author of The Credit Card Guidebook.

“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,” says Hardekopf.

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 all 1060 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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3 Comments on "Overdraft Bank Fees: How To Avoid Them With New Fed Rules"

  1. Woodforestburner | October 16, 2011 at 4:16 am |

    What about when you have a positive balance and they fee you into overdraft , then close your account without notification and send you to collection to make money on you twice after ninety days. Then they start on your savings? Oh and you have already opted for point of sale denial?

  2. I don’t understand how the banks and post checks after the banks are closed and charge you fees that you can’t even cover until the next day. and, they always withdraw the biggest checks first to screw you out of money why don’t they just charge a flat percentage oh yeah because that would be fair and banks aren’t here to be fair now are they you’re here to take money from all the little people give it to the big people as long as were forced to have bank accounts we will be manipulated

  3. As comments above I have experienced the same BS banks are pulling strictly to rip you off!! I have disputed several of their sneaky NSF games and they did refund NSF, HOWEVER here I am again a charge that was made WHILE FUNDS WERE AVAILABLE back a whole month ago NOW SHOWS UP??!!! They tried to hold my paycheck which the employer uses same bank BBVA COMPASS! I told them I’m disputing their NSF cbharge and still do not want to release my whole paycheck, they want to keep. NSF charge then give me remainder of check WHEN I DON’T OWE THEM A PENNY FOR A MONTH OLD CHARGE! !! ARE YOU KIDDING ME!!!!! BANKS ARE SNAKES WAITING TO BITE! !! BUT THIS IS NO SURPRISE JUST LOOK AT HUGE CORPORATIONS RUNNING OUR REPUBLICAN POLITICIANS AS THEIR PUPPETS!!! THESE ARE THE SAME PEOPLE WHO DON’T WANT TO PAY FAIR TAXES AND WANT THE “little guys” to ABSORB. the deficits THEIR GREEDY THIEVERY HAS CREATED! !!! WE REALLY NEED TO STOP GIVING THEM BUSINESS! !!

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