New rules for checking account overdraft fees kick in summer 2010, requiring banks to get your permission before they enroll you in overdraft protection plans for debit card purchases and ATM withdrawals. Here are six things you need to know about these regulations.
1. When New Rules Apply to Checking Accounts
The new rules are effective July 1, 2010 for new accounts and August 15, 2010 for existing accounts.
2. Not All Checking Account Overdrafts Covered
The new rules apply only to debit card purchases and ATM withdrawals. They don't apply to checks written on your account or automatic bill payments, so even if you opt in for debit card overdraft protection, you still can rack up overdraft fees if you bounce checks or don't have enough money in your account when bills are paid automatically.
3. Opting In Not a Guarantee for Coverage
The bank's coverage of a debit card overdraft, even if you opt in for the coverage, isn't guaranteed. The bank provides the service at its discretion, so don't count on getting money from the ATM if your account balance is zero.
4. Reordering Checking Account Transactions Still Allowed
Much to the annoyance of consumer advocates, the Federal Reserve did not address the common bank practice of reordering check processing from highest to lowest amount. So if your mortgage payment is processed the same day you buy a latte with your debit card, your bank may choose to let the mortgage payment go through first. Banks say they do this to ensure the most important payments are made first, but consumer advocates say they do it to maximize the number of overdrafts. It's one more reminder to keep track of your checking account balance and make sure you have enough money to cover all your transactions every day.
5. Some Big Banks Opt Out
In light of the new rules, some banks, including Bank of America, Citibank, and USAA, are no longer covering debit card and ATM overdrafts in exchange for fees. Other banks, meanwhile, are stepping up marketing campaigns to get you to opt in to their overdraft protection programs. Scrutinize overdraft protection programs carefully.
6. Alternative Overdraft Protection Plans: You Have Choices
You don't have to opt in for hefty fees to get overdraft coverage for your debit card. Consider linking your savings account to your checking account to cover overdrafts. The bank may still charge a fee for transfers, but typically it's less than an overdraft fee. Some banks also let you link a checking account to a credit card. Be aware that you will pay the cash-advance interest rate--typically higher than the rate for purchases--to cover overdrafts this way, but the amount is still relatively small if you pay your credit card balance in full.
Despite all the hubbub about overdrafts, most checking account customers don't overdraw their accounts. Eighty-two percent of consumers did not pay an overdraft fee in the previous year, according to a 2009 American Bankers Association survey. The overdraft fees at major banks run about $35, according to a recent survey by the Consumer Federation of America.