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How New Overdraft Rules will Affect You

by Miranda Marquit

July 1, 2010 marked the beginning of new overdraft rules for financial institutions. Starting on July 1, you will have to opt in for overdraft “protection” when you open a new account. For existing accounts, the new rules don’t take effect until August 15, 2010. The fact that you will have to consciously enroll in overdraft protection is likely to give you pause going forward, and this is a good thing.

Prior to the new overdraft rules, financial institutions let transactions made with debit card go through, even if you didn’t have enough money in your account to cover the transaction. In return, the financial institutions charged a fee (usually between $30 and $40) for each transaction in the red. My bank charges $38 for each overdraft. Let’s say that I have $15 in my checking account, and make a series of purchases for $20, $5 and $3. I would be charged $38 for each of those transactions, totaling $114 — even though I have overspent by only $13. You can see why financial institutions love overdraft fees.

New Rules for Overdraft

Now, though, consumers will have to agree to opt in to such overdraft programs, at least as far as debit cards are concerned. This means that if you do not explicitly accept the idea that banks can let transactions go through (and charge you a fee), you will be cut off if you don’t have enough money in your account to cover a purchase. Your transaction will be denied, and you will either have to pay with another card or cash, or reduce the amount of your order. If banks let debit card transactions go through, and you have not opted in, then they cannot charge you overdraft fees.

When you open a new account, you will have to indicate whether you want to use overdraft protection. For those with existing accounts, be on the look out for information about the new overdraft rules. Financial institutions are being required to notify you of the changes, and ask if you want to opt in. As you might imagine, financial institutions are doing their best to convince you that you “need” this “protection”, playing up the convenience of being able to continue buying things even though you don’t actually have the money in your account.

The new rules also apply to ATM transactions. If you do not opt in for standard overdraft protection, you will not be able to use the ATM to overdraw your account. It is worth noting that if you do opt in, and agree to these standard overdraft practices, you can cancel at anytime. You can also choose to opt in later if you decide that the convenience is worth the high price.

This is a good time to re-evaluate your money management and spending practices, and consider keeping better track of your accounts so that you do not spend more than you have in your account.

Banks Can Still Collect Some Overdraft Fees

While the new rules will affect your debit card purchases, there are still ways for financial institutions to collect fees on overdrafts. You may not opt in for overdraft protection, but it important to note that the new rules do not apply to checks that you write, or to ACH billing. This means that your checks and automatic billing arrangements can still come with overdraft charges, rather than being denied, even if you choose not to accept standard overdraft protection.

If you want to cancel overdraft practices on automatic billing and checks, you will have to speak with your bank specifically about their practices. However, banks are under no obligation to deny automatic billing transactions or checks that will overdraw your account.

Is Overdraft Right for You?

Many would argue that you should never need overdraft protection, as long as you live within your means and keep tabs on your spending. For those who habitually engage in overdrawing their accounts, it might actually be best not to opt in. This could be a chance to let tough love force a change in spending habits.

For those who rarely overdraw their accounts, though, opting in might not be such a bad thing. It can protect you against mistakes, or the occasional month when your cash flow is a little off. However, it is important to avoid letting overdrawing your account a regular occurrence. Evaluate your situation individually, and decide whether or not overdraft protection of this nature would help keep your finances moving smoothly.


Published or updated July 1, 2010.
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{ 2 comments… read them below or add one }

1 basicmoneytips

I work in the software industry so I have seen these changes go in firsthand. If you are not a regular balancer of your checkbook, I would probably opt out of the charges. Banks can no longer charge fees as they previously did, so they are going to be more aggressive with the fees they will charge. Personally I would rather be declined if I do not have the cash in my account.

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2 Len Penzo

Nice article, Miranda! I’ve always thought the bank’s overdraft “protection” service was a scam that preyed on financially irresponsible people. Compounding the problem is that those folk usually fail to learn from their overdraft mistakes, and so they are continually hit with those bank penalties.

That being said, I think it is a valuable service for those of us who ARE responsible and properly manage their personal finances.

All the best,

Len
Len Penzo dot Com

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