Do consumers really want bank overdraft protection?
That’s a question the venerable Federal Reserve is studying in 2009. The Fed is mulling giving bank consumers the right to opt out of a bank overdraft program – and may even give consumers the right to have small debit card transactions canceled, rather than have them trigger an overdraft.
Public comments on two key consumer overdraft proposals from the Fed ended on March 30, and the Fed is expected to roll out its decision, most likely leading to some kind of overdraft reform, sometime this summer. The proposals would:
• Allow banks to notify bank customers of their right to opt-out of bank overdraft protection, but automatically include bank customers if they ignore the notice
• Require banks to get permission from bank customers before enrolling them in overdraft protection services.
So why the need for the fed to potentially intervene on bank overdrafts? In a word – fees – and a lot of them. According to a 2008 study from the Federal Deposit Insurance Corporation (FDIC), bank fees, on an annual basis, are a big cash cow for U.S. banks, worth $17.5 billion in revenue. The FDIC study also says that automatic bank overdraft fees can trigger fees ranging from $10 to $38 per overdraft. In addition, the FDIC found that 75% of U.S. banks automatically enroll their customers in automatic overdraft protection services.
Leaving the decision to consumers on overdraft protection, may be a welcome benefit to bank customers. But to make the right decision, those same consumers need to know how overdraft protection works, how big fees are triggered, and what they can do to minimize overdraft fees if they decide to opt in on such plans.
Here’s a snapshot of what consumers need to know about bank overdraft plans:
Keep a close eye on your checking account – Virtually all bank overdraft issues are related to either insufficient funds on checks you paid out, or not enough money in your checking account to cover a debit card purchase. Most banks will allow the debit card purchase to go through, and may even clear your check.
But such transactions can add up. If you make three purchases on your debit card that your bank account can’t cover, your bank may allow the transactions to go through, but will hit you with three separate overdraft fees. At $35 a pop, those three overdrafts will set you back $105 – a hefty hit for three measly debit card purchases. Your best bet? Get online and hit your bank’s web site. Sign up for online banking and regularly bring up your checking account to track purchases, canceled checks, and account assets. Aim to do so at least once every 48 hours, especially if you’ve paid out a lot of checks or made numerous debit card purchases.
Watch out for “holds” – Many businesses, especially rental car agencies, hotels, and even gas stations, will pace a hold on your purchase above and beyond the amount of the original charge. They do so to leave some wiggle room to charge you more if you raid the mini-fridge in your hotel room or don’t fill the tank up on your rental car (a consumer finance no-no, by the way. Rental car firms charge much more to fill your car’s tank than what you would pay at a gas station). Holds can eat into your bank account and may take several days for the hold to clear. In the meantime, if you’re not aware of a hold, you might make an extra purchase or two, and thus potentially trigger overdraft fees you didn’t see coming. The Fed is also studying the issue of “holds” in its reform initiative this year, although it’s unclear whether they can abolish them.
Keep your overdrafts down – and your credit worthiness up – A history of bounced checks won’t show up on your credit report, but do know this. If you don’t make good on the bad check, the recipient can turn the debt over to a collection agency and they can and likely will report your bad check debt to a credit agency.
Whether you want overdraft protection or not, it pays to know the ramifications of an overextended bank account. Pretty soon it may be up to you to decide if you want the protection or not.
So go into that decision-making process well-educated and well-prepared to be pro-active about keeping overdrafts to a minimum, and more cash in your bank account.
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