Checking Account Overdraft Fees: Opt Out of a Costly Convenience
July 02, 2010
| MoneyRates.com Senior Financial Analyst, CFA
New federal regulations concerning overdraft fees go into effect on July 1, 2010 that limit the practice of overdraft protection. Most prominently, these rules give you the opportunity to opt out of overdraft protection for your bank account.
Why would anybody want to give up a form of protection? Because in many cases, overdraft protection is overly expensive and may encourage poor financial habits.
At the very least, the new rules will allow you to make a more informed choice, based on the costs and benefits of overdraft protection. The following information should help you make that choice.
An Epidemic of Overdraft Fees
"Epidemic" is a strong word to use, but when you consider the sheer number of account overdraft occurrences and the magnitude of each resulting fee, it is not an inaccurate description of the situation in recent years.
According to the Center for Responsible Lending (CRL), 51 million Americans overdrew their accounts at least once in a 12-month period, including 27 million who had five or more overdrafts, and 18 million who had an astonishing ten or more overdrafts within the space of a year.
Given the bank fees associated with overdrafts, the combined costs of account overdrafts really add up. The CRL estimates that Americans spent a total of $23.7 billion in overdraft fees in 2008, or nearly a billion dollars more than they spent that year on fresh vegetables.
The Cost of Convenience
Why are Americans overdrafting their accounts and racking up fees at such a rapid pace? In a word, convenience. Modern electronic bank processing systems have reduced the time to log credits and debits to your account, but a brief delay still exists. Debit cards make it easy to access your checking account on the fly, but since you no longer have to carry around a bulky checkbook and check register, many people often fail to log their transactions and update their balances. Hence the overdrafts.
As a convenience, banks offer to honor your overdrawn obligations--for a price. According to the CRL, overdraft fees average about $34. That's roughly the amount you might pay filling up your gas tank--so if you overdraft your account when paying for that gas, you've effectively just doubled the price of gas. Even so-called check cashing locales do not charge 100% or more interest for only a few days.
Of course, one of the prime features of debit cards is that they may be more convenient than cash for small purchases. However, if you overdraft your account for a purchase of less than $5, $10, or even $20, you may pay many times the cost of the product for the sake of that convenience. Any way you look at them, overdraft fees are effectively an extraordinarily expensive way to borrow money.
New Federal Rules
Federal Reserve Board rules effective in 2010 make it easier for you to avoid overdraft fees. First, a rule that became effective on January 1, 2010 requires banks to clearly disclose on each statement how much you paid in that period for overdraft fees and how much you've paid year-to-date.
A rule effective July 1, 2010 will prohibit banks from charging overdraft fees unless you explicitly "opt in" to the overdraft protection service beforehand. And even after you opt in, you may choose to opt out at any point in the future. Banks are lobbying their customers to get them to opt in to overdraft protection programs, because overdraft fees are such a money-maker for banks.
Of course, if you opt out, rather than having your overdrafts covered, those transactions will simply be denied. That may be an inconvenience--but just think how much you might save in potential overdraft protection fees.
The bottom line is this: unless overdrafting your account is a very rare occurrence (say, once every few years), you've probably been paying too much for the convenience of overdraft protection. Thanks to the new Federal Reserve Board rules, you'll be much better informed about just how much it costs you--and empowered if you wish to tell your bank "no, thanks."
