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Don’t get dinged by overdraft fees

Opting in to an overdraft-protection program can cost you big bucks

Consumer Reports magazine: June 2012

Illustration: Stephen Webster

High-profile hikes in checking-account fees by big banks have drawn more attention recently than overdraft charges, those sneaky debit-card fees that can add $35 to the cost of a $3 cup of coffee. Despite federal rules on overdraft fees that went into effect in 2010, banks are still pulling in billions of dollars from them.

That’s because many bank customers have opted in to overdraft-protection programs, which allow you to use your debit card for purchases even if you don’t have enough money in your account to cover the payment. Each overdraft incurs a fee of about $30 to $35. Under the 2010 regulations, banks must ask you to choose overdraft protection rather than enroll you automatically. (If you opt out, you can still be charged a fee if an overdraft occurs from a check you’ve written, an online payment, or an automatic recurring debit.)

Banks aggressively market overdraft protection to customers. A 2011 survey of checking-account holders by the Center for Responsible Lending found that 33 percent had opted in, and many said they did so to avoid fees. Moebs Services, an independent financial-research company in Lake Bluff, Ill., surveyed banks in 2011 and found a much higher opt-in rate: 77 percent. Last year, Moebs says, banks took in $31.6 billion in overdraft fees.

$120 mistake, $506 in fees

In February the federal Consumer Financial Protection Bureau announced it was looking into overdraft programs. It is focusing on the practice of processing daily checking transactions—checks, bill payments, debit-card purchases, and ATM withdrawals—in order of size, starting with the largest first. An account can be quickly drained, and banks can maximize the number of overdraft fees.

A 2010 class-action lawsuit against Wells Fargo in California, which resulted in an order that the bank pay $203 million in restitution to customers, highlighted how overdraft fees can spin out of control. One plaintiff, Erin Walker, an 18-year-old who had just opened her first bank account, was charged $506 in fees over a one-week period for an overdraft of about $120. Wells Fargo did that in part by ordering her transactions so that most of them—purchases of about $4 to $5 at places like Starbucks and Jamba Juice—were posted after larger purchases. Wells Fargo is appealing the decision.

The CFPB is seeking comments from consumers on how they’ve been affected by bank practices, including transaction reordering and the terms of overdraft programs, and how they’re communicated. The agency is also seeking feedback on a “penalty fee box” that would appear on checking statements containing overdrafts. Weigh in on the CFPB's site.

What you can do

To avoid overdraft fees:

Decline overdraft protection. If you’ve already signed up, you can contact your bank to opt out. Your debit card will be declined if you exceed your balance, but you won’t get hit with overdraft fees.

Link your accounts. Ask your bank to link your savings to your checking account for overdraft protection. You might get hit with a transfer fee, but it’s generally lower, about $5 to $10.

Consider an overdraft line of credit. Any overdrafts will be covered by the line of credit. They will incur interest but you’ll probably pay less than overdraft fees.

Budget better. Sign up for e-mail or text alerts to know when your account balance falls to a certain level. Balance your checkbook regularly, and keep track of all checks you have written, debit transactions, automatic bill payments, and direct deposits.

Goodbye, free checking

Of the 10 biggest consumer banks in the U.S., only PNC and Ally Bank still offer a no-monthly-fee checking account. Other banks are tacking on new charges or imposing tougher conditions for fee waivers:

• Wells Fargo was expected to add a $7-per-month checking-account fee to customer accounts in six states in May, after imposing similar fees in 24 states last year. Customers who maintain a balance of $1,500 or make $500 or more in direct deposits monthly get a fee waiver; those who accept paperless statements will have it knocked down to $5.

• Bank of America rolled back plans for a $5 monthly debit-card fee last year, and it is testing new checking-account fees in Arizona, Georgia, and Massachusetts.

• Citizens Bank doubled its monthly fee from $5 to $10 on its Green Checking in April, which customers can avoid by maintaining a $1,500 balance or making five qualifying transactions each month.
   

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