It happens to the best of us - you write a check or charge something on your debit card, only to find an "insufficient funds" charge on your bank statement. You may not have even realized how low your balance had gotten or forgotten you mailed another check last week. Before now, your bank could automatically enroll you in an overdraft plan, authorizing transactions even when your balance is low and charging hefty fees for the privilege. Now, a ruling from the Federal Reserve, effective August 15, says that banks must give you the ability to opt in or out of such coverage. This is great news for consumers. Here's what you need to know about the new ruling.
What happens if you opt in
If you sign up for an overdraft plan, your bank will authorize transactions whether you have the money in your account or not. This includes checks, ATM withdrawals and debit card charges. When you overdraw your account, you will be charged about $20 to $35 per transaction. While you'll avoid fees for bounced checks and the embarrassment of a declined transaction, these overdraft fees can add up quickly.
What happens if you opt out
Many experts, including the Consumerist blog, recommend opting out of overdraft programs. If you decide not to sign up, transactions will be declined if you don't have enough money in your account - for the most part. The exception is checks and automatic bill payments. The Federal Reserve website notes that banks may still approve these transactions at their discretion and charge you overdraft fees even if you've opted out of their overdraft program. It's up to your bank whether you can opt-out of overdraft practices entirely. Bank of America, our top pick for online banking, made news when it announced that they would automatically deny ATM withdrawals and debit card purchases when your account balance is too low to cover the transaction, rather than charging you overdraft fees.
Other options for avoiding overdraft fees
Most banks offer what's called overdraft protection, which differs from the practices described above. Overdraft protection is actually a line of credit. Should you overdraw your account, this line of credit will cover your transactions. Like a credit card, you'll receive a bill and you'll be charged interest on that balance. Not everyone can get overdraft protection; it requires a credit check, which will determine your eligibility, credit limit and interest rate. This could be a less expensive option than the fee-based overdraft programs, but you have to be careful not to depend on overdraft protection to cover your expenses. If you abuse this protection, the bank may lower your credit limit or close your overdraft account.
Of course, the best way to avoid overdraft fees is to keep close tabs on your balance. You can sign up for a personal finance site, like Mint.com, to keep track of your account balances and create a budget. As Consumerist points out, most banks will send you email or text alerts when your account balance is low.
For all the information about the new overdraft regulations, see the Federal Reserve's website, which also covers credit cards, bank accounts and identity theft.