How to avoid debit-card overdraft fees ahead of Fed's new rules

Consumer Reports News: November 13, 2009 12:30 PM

Under new rules announced Thursday by the Federal Reserve, banks will no longer be allowed to automatically enroll their customers in expensive overdraft loan programs. Banks will be required to get their customers' permission first before they can charge expensive fees when debit and ATM card transactions trigger an overdraft.

The rules don't kick in for new cards until July 1 and for existing accounts, Aug. 15. And, the rules don't cover checks or recurring debit transactions—like those for utility, phone, or rent payments.

Most large banks automatically enroll their customers in overdraft programs, which are really high-cost loans that generate billions of dollars in excessive fees every year. Banks are expected to collect more than $38 billion in fees from overdrafts this year.

Debit card overdrafts could be prevented with a warning that there are not enough funds in the account, or by declining the transaction. Instead, most banks let these transactions go through and charge consumers a fee for each overdraft; the average fee is $35, according to Consumer Federation of America. If you don't pay back the overdraft within a few days—or sometimes a single day—you'll be hit with additional overdraft charges.

Here's an example: According to Consumer Federation of America, a Bank of America customer who overdraws on four transactions that total more than $10 would be charged $35 each for a total of $140. If the overdraft isn't repaid in five days, the customer would get hit for another $35 sustained overdraft for each unpaid overdraft. Total: $280 in fees in under a week.

Until the new rules kick in there are a few things you can do:

• Link your checking account to a savings account and set up overdraft transfer protection. With this method, the cost for overdrawing the checking account is generally lower, say $10 each time.
• Opt out. Bank of America already allows customers to opt out of its overdraft program by calling 888-717-3999. Chase and Wells Fargo have announced that they will soon implement an opt-out provision, and like B of A are limiting when and how many overdrafts they charge.
• Budget better. Balance your check book and sign up for e-mail or text message alerts from your bank or from a personal finance Web site to tell you when you're account has fallen to a certain level.
• See the Consumer Federation of America's study of the major banks, so you can choose a bank that works for you. Don't forget to check out your local bank, which might have more consumer-friendly terms.—Chris Fichera

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How to avoid debit-card overdraft fees ahead of Fed's new rules

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