The Federal Reserve finally acted yesterday to reduce some of the 30 billion dollars in fees that banks collect every year with automatic overdraft “protection.” What they didn’t address while patting themselves in the back in their press release, however, is why it took them so long to act and why it’s going to be so long (July,1010) before the new rules go into effect.
Why did consumer advocates (including yours truly) hate the automatic “courtesy” overdraft protection banks began attaching to accounts a couple of years back? First, because this it was nothing more than a blatant attempt by banks to maximize fee income from customers least likely able to afford it. But just as despicable, at least in my opinion, was their insistence that this fee grab was only done to “protect” people.
I talked about this in an October 2008 story: http://www.moneytalksnews.com/2008/10/13/avoiding-overdraft-fees/
Here’s how this “protection” works: when you sign up for a checking account, you’re automatically enrolled in the bank’s “courtesy overdraft protection program.” This means that should you overdraw your account, the bank will automatically advance the funds to make good your transaction. (If they want to: it’s at their discretion.) Sounds neighborly. Until you realize that the bank is charging $30 – $35 per transaction, no matter how small and no matter how many. So if you use your debit card to buy a $3 latte when there’s only $2.95 in your account, you’re now drinking a $33 latte…with no notice. Better system? Swipe your debit card and get notifiied that there’s not enough in your account to complete the transaction. Then find some change under your front seat and get a $1 coffee at 7-11. Or at least understand what this form of protection really means and make a conscious decision to opt-in, not be automatically enrolled without your knowledge or consent: that’s what the new ruling will end.
So if this form of overdraft protection sucks, what should you do instead? I’d be remiss if I didn’t say you shouldn’t really need overdraft protection because you should always reconcile your bank account so as not to bounce checks. But since we live in the real world; the best form of overdraft protection is either a line of credit that automatically kicks in should you overdraw your account (which means you’d be paying interest, but not fees) or to tie a savings account to your checking account. A third option is to try the system they used back in the old days: when you run out of money, stop spending it.
Bottom line? I’m glad the Feds finally acted. But I gotta wonder why we have to wait until next July… after the banks collect another 20 billion or so in fees… before this particular brand of bank robbery is history.