Banks make billions by charging people overdraft "protection" fees. The Center for Responsible Lending says that banks took in about $24 billion in 2008; estimates for 2009 are well over $30 billion.
New federal rules take effect on July 1 that will require you to actively accept overdraft protection (ODP) from your institution for ATM and debit-card transactions. Here's what you need to know.
The fine print
Some banks are changing their policies before the new laws take effect. Has yours? It can be tricky to figure out, because there are three types of overdraft protection, according to Ky Tran-Trong, a lawyer for the Federal Reserve Board in Washington, D.C.
- One is an overdraft line of credit, which is like a credit card linked to your checking account for ODP purposes. The interest rate is usually sky high.
- Another is an automatic transfer from your savings. Your bank may or may not charge a fee for this service.
- The last is a cushion of, say, $200 that the bank provides, if your ATM or debit-card transactions exceed your account balance.
Under the new laws, you have to agree to the ATM and debit-card overdraft. But you still may have ODP in some other form. (P.S. bounced check coverage is separate; look into that as well.)
Don't swipe and pray
Call your bank to learn what sort of overdraft coverage you have—and read all the notices your bank sends. It's up to you to choose whether you want any overdraft protection at all. It's smarter and cheaper to be your own source of protection—by knowing what's in your account, setting up an automatic transfer from savings or simply keeping a cash cushion in your account.