Are You In or Out? Just a Few More Days to Decide

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If you use a debit card, the rules are changing next week. Whether those changes are good or bad depends on who you talk to, how you use your card and how often you overdraw your bank account. (See the story we did on this back in July.)

Consumer advocates are happy about a new federal regulation that goes into affect this Sunday, Aug. 15. It bans so-called “overdraft protection” on debit cards, unless customers specifically tell their banks they want it by “opting in.”

Overdraft protection sounds like a great service – at first. Simply put, if you make a debit card purchase without adequate money in your account, your bank covers the charge, but charges you a fee averaging $35. So even small overdrafts lead to big bucks: spend $2.50 on a cup of coffee, you could end up paying a total of $37.50 for it.

An option most consumer advocates prefer – simply having the card declined when there’s not enough in your account to cover the charge. That costs nothing. Or tying a savings account to your checking account so money automatically transfers when necessary. Even adding a line of credit to your checking account to cover overdrafts is nearly always less expensive than debit overdraft coverage.

“Debit card overdraft coverage is a very expensive option for consumers, with fees nearly twice the amount of credit actually extended,” says a new report from the Center for Responsible Lending in Washington, D.C. “Consumers using their debit cards for several transactions throughout the day can incur hundreds of dollars in overdraft fees over a short period of time.”

The 11-page report, titled “Banks Target, Mislead Consumers As Overdraft Deadline Nears,” finds…

  • By 2008, banks and credit unions were collecting nearly $10 billion a year in overdraft fees from debit card transactions.
  • With so much money at stake, banks are turning to high-pressure marketing tactics to get you to “opt in.” And they’re purposefully targeting their most financially vulnerable customers.

Even so, most customers aren’t buying the hype. A national survey by ACTON Marketing shows 57 percent of bank customers will likely opt out of overdraft protection for their debit cards. That same survey reveals that 75 percent of Americans use debit cards.

Naturally, banks aren’t as happy as consumer advocates.

Bob Meara, a senior analyst with Celent, a consulting firm for banks, warned on his blog that this new regulation – part of the federal government’s recent financial reform package – could have an unintended side effect that will really hurt customers. Namely, the end of free checking accounts.

“A majority of banking customers received banking services essentially free of charge and didn’t appreciate it,” Meara wrote last week, “while a small minority of customers paid significant NSF fees (ostensibly due to their own negligence) and ended up offended.”

Many banks and their consultants warn that the money lost from overdraft protection will be made up by getting rid of free checking. We’ll have to wait and see. Until then, here are two suggestions from the Center for Responsible Lending to overcome overdraft fees.

  • To protect your account from costly overdraft fees, don’t “opt-in” to overdraft coverage on your debit card. Consider lower-cost alternatives such as a line of credit or linking an account with back-up funds.
  • Consider signing up for programs your bank offers to help you monitor your account balance, such as low balance alerts through emails or text messages.

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Comments & discussion

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  • http://www.facebook.com/newkirkiii John Newkirk III

    The Bank of Mauston threatens that if you don’t opt-in and your debit card causes an overdraft they’ll pull your card. With the reordering rules they can take it anytime they want. They’ve told me they CAN’T deny to pay for ISF’s. It’s the law. In my opinion these strong arm tactics is why opt-in’s are up. I don’t believe in credit cards. Try traveling with checks. I opted-in. No Choice! Another useless law.

  • http://www.facebook.com/people/Kenny-Ely/100000115456351 Kenny Ely

    I’m not sure where else to ask this so here goes, the University of Kentucky Credit Union says that it doesn’t matter if I opt in or out, I will still get a fee if my account balance is lower than an attempted purchase. They say that by opting in I will get the fee and they will pay for the purchase. If i don’t opt in I just get the fee. How can they charge me an overdraft fee when they are not paying for a purchase and I’m not overdraft?