Beware New Checking Account 'Opt-In' Rules

NEW YORK ( TheStreet) -- Federal Reserve rules on checking accounts started this past weekend, and some Americans may be surprised by the changes, especially this one: Overdraft protection is no longer available for checking accounts unless customers "opted in."

Before these Federal Reserve rules took effect, most banks automatically added overdraft protection to checking accounts, providing the details and fees in the fine print. Some customers didn't realize the high price of the fee until they incurred the charge.

An overdraft occurs when there isn't enough money in a checking account to pay for a transaction, but it is paid by the bank anyway. This isn't free; it's a loan from the bank, and banks charge a nonsufficient-funds paid item fee -- typically $30 to $40 -- for each transaction paid in this manner.

If you didn't opt in for this, your bank's standard overdraft practices no longer apply to your everyday debit card and ATM transactions. Now transactions will typically be declined when you don't have enough money in your account, but you will not be charged overdraft fees.

The rules don't lock you to your choice forever; you can still make changes to your account, opting in or out of overdraft protection at any time.

The rules are good for consumers but reduce revenue for banks. Some banks will try to persuade customers to choose the "benefits" of overdraft protection, since they are anxious to hold on to as much fee income as they can. The Consumerist website reported last week on the branch manager of a bank who quit because he felt his employer was forcing him to trick customers into signing up.

This is a good time to sign up for free online alerts offered by most issuers. You can get a daily text or e-mail telling you the balance in your account. Knowing the amount of money in your checking account can help avoid the embarrassment of a declined purchase.

The Fed rules do not cover checks or automatic bill payments -- banks can still authorize and pay overdrafts for these transactions at their discretion and charge a fee. If you do not want your bank's standard overdraft practices in these instances, talk to your bank; they may give you the option to cancel.

Statistics on how many people opted for overdraft protection are not yet available. A July poll by the National Foundation for Credit Counseling found 26% of 2,089 respondents intended to opt in for overdraft protection.

If you are interested in the overdraft protection, be sure to read the fine print carefully to understand its costs and limitations. If your account remains overdrawn, for example, you might incur additional fees, and banks can charge the items to your account in any order they choose. A judge in California issued a $200 million fine Aug. 10 against Wells Fargo ( WFC) for using a "bookkeeping device" to pay customers' most expensive charge first, increasing the chances an account would be overdrawn so the bank could charge more fees on subsequent charges. "The bank went to considerable effort to hide these manipulations while constructing a facade of phony disclosure," CNNMoney reported the judge as saying in his finding.

Finally, even if you choose to opt in, the payment of an item is discretionary. Banks will choose which transactions to cover, so a consumer can't always can't count on having overdraft protection when it's needed.

Your bank may offer less expensive alternatives to overdraft protection. Some banks allow you to create a link to your credit card, savings account or line of credit that will fund overdrawn transactions. There is a fee for each transaction, but it is typically $5 to $10, much less than the overdraft protection. You must contact your bank to set up this alternative service, since it is not part of the opt-in selection.

-- Reported by Bill Hardekopf of LowCards.com.
Bill Hardekopf is chief executive of LowCards.com, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."