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Banking Overdraft Fees and Overdraft Protection Plans

One of the top signs that you are not in control of your finances is regularly paying banking overdraft fees or signing up for overdraft protection.  Not knowing how much money is in your banking account at any given time isn't a good sign that you are budgeting your money wisely and using overdraft protection to spend beyond your means is never a good idea.

Until 2010, banks really took advantage of people who habitually overspent their banking accounts using ATM withdrawals and debit cards.  For a number of years, the banking industry was automatically enrolling their customers in overdraft protection plans, and instead of denying an ATM charge when a customer exceeded the balance in his checking account, the bank would simply approve the charge and access a rather hefty fee, ranging from $25 to $35 for the privilege of buying something as little as a $3 sandwich with their debit card. Some consumers were racking up big charges for little purchases.  For example, one case reported in the media featured a young soldier who apparently had no idea how much money he had in his checking account and went on a spending spree purchasing a $5 meal here and a $2 drink there, racking up an unbelievable $800 in overdraft fees.  He, like most people, wished that the bank had just told him he didn't have enough money in his account to make those purchases. And, if consumers didn't bring their accounts back in to positive territory within a week, banks would usually tack on even more fees, sometimes charging as much as $10 everyday the account was in the red.  Consumers were, in effect, using overdraft protection to obtain quick, high-interest payday loans.

Just in the year 2009, banks racked in some $38 billion in overdraft fees alone and any bank employee could tell you that the bank managers used to brag about how much they were making off of customers who habitually overdrew their accounts.  Offering overdraft protection became so lucrative that all of the top ten banks in the USA had adopted it by 2007, and 86 percent of all banks offered overdraft protection, with most automatically enrolling customers in it so they could collect the big fees.  Banks could increase their annual profit substantially just by offering overdraft protection, and some of the larger banks increased their profit 300 percent.

But in the year 2010, bankers stopped laughing when new rules were passed by the Federal Reserve limiting banks' ability to charge overdraft protection. Banks can no longer automatically enroll all their customers in overdraft protection plans as almost 90 percent of them had been doing.  Now, customers must opt in for such protection, which significantly reduces banking profits.  As a result, banks began eliminating free checking services and charging monthly checking account fees to make up the difference.

Note that the new rules do not apply to checks and automatic bill payments  Your bank can still charge overdraft fees on these types of transactions. The rules apply only to ATM withdrawals and using debit cards at point of sale terminals.

If you find that you just can't help yourself and you're never going to know how much is in your checking account at any given time, please do not sign up for automatic overdraft protection.  Instead, find a bank that is willing to link the automatic overdraft protection to a savings account or credit card. This way, if you ever exceed your account balance, the bank can debit the difference from another account without charging you a fee. Of course, not every bank is willing to do this, so you will have to shop around for a bank that will. 

Representative Carolyn Maloney, a democrat from New York, has been trying to get the Consumer Overdraft Protection Fair Practices Act passed since 2007, but so far, without success.  If this bill is ever passed, it will require banks to notify consumers at the point of sale that their debit card purchase exceeds their account balance and continuing with the purchase will result in an overdraft charge.  Consumers will be given the option to terminate the transaction at that point, just as consumers are allowed to do at many ATM machines.  In addition, the Maloney Bill is similar to the recent rules passed by the Federal Reserve in that it (1) requires consumer consent to participate in overdraft protection and (2) prevents banks from posting checks and deposits in a sequence that causes more checks to bounce.

In addition, Rep. Maloney wants the Truth in Lending Act amended so that overdraft protection fees are considered to be finance charges, and therefore, the banking industry must report overdraft fees to the consumer every year in a statement.  Maloney hopes that if consumers are made more aware of how much money they are wasting on overdraft fees they will curtail their spending and keep a closer eye on how much money they have in their checking accounts. As of May 2012, the Consumer Overdraft Protection Fair Practices Act has not become law.

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