As of August 15th, 2010, there are new laws in place regarding overdraft fees from your bank. Up until that date, many banks and credit unions automatically enrolled customers in an overdraft service that could run as much as $35 each time you over-drafted your account. This service was there (in addition to padding the bank’s bottom line) to “protect you” from having your card declined due to having insufficient funds in your account. Granted, if they had just left the $35 IN the account, maybe you wouldn’t have gone over the limit, but still – this was an automatic enrollment and not something you could opt out of. Well, that all changed on August 15th, when the overdraft section of the financial legislation overhaul went into effect.
An overdraft fee is a financial penalty that the bank takes from you when you try to spend more money than you currently have available in your account. Ranging from $20-$35 or so, banks have been making a fortune off this fee for many, many years, without you having a choice if you wanted to pay it. Overdraft your account, they take the fee. Period, the end. But now you can opt-out of the fee, and your card(s) will just be declined if you do not have enough money to cover the purchase. I really appreciate this new rule, because I think it encourages people to be more diligent in knowing the balance of their accounts and just how much they can spend. By opting out of this service, it’s almost like using cash to buy things with, in that you have to actually have the money to spend it! (True, this is for debit or ATM cards only, and I will touch on using credit cards instead a little later) So what can you expect from your bank now that the rules have gone into place?
The new Federal Reserve rules state that your bank and/or credit union, (or any financial institution you may deal with) has to send you an explanation of how their overdraft rules can apply to your account. This is for all debit and/or ATM cards that you have at your bank of choice. You now have a choice to enroll in their overdraft service or not, and you will be marked as opting out if you do not specifically opt in and agree to their rules. If you do opt in and agree to pay for the overdraft service, you can still change your mind and cancel at any time in the future. You may also do the opposite – opt out now and opt in later. (But I say you stay opted out) These new rules do not necessarily apply, however, to writing checks and/or any bills you have automatically paid out of your account. Banks may still charge you overdraft fees on these transactions, and it’s up to you to make sure you have enough in the account to cover those type of drafts.
Anything to reign in the absurd profits that banks have been making off people is good news in my book. Yes, they need to make money, otherwise they don’t have any money to lend out to borrowers like you and I. But there is a difference between making a profit and just gouging your customers – and thus I like this new rule. Personally, I have never overdrafted my checking account for anything, so I would never have needed this service on my account and have never paid the fee. But if you run that risk on occasion, a better alternative to the bank fees would be to use your credit card for purchases and pay off any balance at the end of each month. I rarely, if ever, use my ATM card for buying anything. I always use my rewards credit card so that I have protection against fraudulent activity and my checking account doesn’t get cleaned out. And to make sure I always pay off my card each month, I make 4 monthly payments every Monday that equal an approximation of my monthly expenditures and automatic payments to bills. So if my monthly credit card bill is $500, I send $125 every Monday to the credit card company. This makes the balance easier to pay every month and assures me that my balance is always paid off. So while the new Federal Reserve rules can help you avoid overdraft charges, there are also other ways to keep annoying fees from raiding your bank accounts!
Photo by frankh