Credit Cards

New Rules for Overdraft Fees on Debit Cards

Comments 3 Comments

03-15-10-debit-card-overdraft-lg.gif 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.
  • Money

    When someone writes a check that exceeds the balance in their account, isn’t it in their best interest to have their bank pay the item into the negative and charge them a fee rather than return the item UNPAID and charge them the same fee??? I don’t understand what the controversy is here. If you use your debit card or write a check when there is insufficent funds in your account shouldn’t there be a penalty?

  • http://profile.typepad.com/6p011570ec15e3970c Deanna Templeton

    There should absolutely be a fee to borrow against negative charges on your account. The controversy relates to giving consumers a choice. They can either pay to have a safety net with fees if they go in the red, or they can choose to decline the fees and also be declined a charge when they have insufficient funds.
    In many cases, when a consumer does accidentally go into the red, banks will pay the larger charges first (instead of pushing them through in order of the charges or paying the smaller amounts that would not be hit with a fee first.) And often times this leads to several over limit fees when it really should be just one for example. They should be charged for whatever they over spend, but to purposely push through larger charges first just to increase their profit and charge more fees on the smaller charges? That just seems unethical to me. The other side of the controversy is that Banks believe giving consumers a choice goes to far.
    I’m not disagreeing with you – just pointing out the controversy. I fully agree that we as consumers need to be more aware of our finances, balance our checkbooks, and take control of our money and hold ourselves accountable for poor decisions. I also see no problem with giving consumers the choice to opt-in or opt-out for over limit charges when they DO make a bad call with their checking accounts or debit cards.

  • Jason

    The real problem as I see it today isn’t whether consmers have a choice to have the overdrat service or not. I am a banker and one of my least favorite parts of the job when I have to refuse to pay a customer’s check or automatic withdrawal item and the system charges them anyway. That is bull. The whole explanation given by the banking industry for these charges is that a customer would rather have their item honored and gladly pays the “small fee” to avoid embarrassment and the charges that the other merchant would assess if the item were returned. If the item is returned by my bank, that justification goes away because they are embarrassed and charged by the other merchant, and still pay us a fee as well. I do believe that people are adults who should be resonsible for properly managing their affairs, and that there should be a fee if you overdraw your account (whether they should be as high as they are is a separate issue.) I have tried unsuccessfully to find out whether this new policy will forbid the bank from charging a fee if you opt not to enroll in the overdraft service.

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