New Overdraft Rules for Debit and ATM Cards

7/22/2010

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On July 1st new rules went into effect concerning overdrafts on your debit or ATM cards. You now get to choose in advance what happens when you make a charge on your debit or ATM card and don’t have enough money in your account to pay for it.

Let’s say you buy something with your debit or ATM card but haven’t been keeping track of how much you have in your account.  It turns out you don’t have enough money in there, which means the withdrawal will lead to an overdraft.  According to the Federal Reserve Board Web site http://www.federalreserve.gov/consumerinfo/wyntk_overdraft.htm there are usually two ways that banks deal with an overdraft:

  • Standard overdraft practices. Your bank will cover your transaction for a flat fee of about $20-$35 each time you overdraw your account. For example, if you make a purchase with your debit card for $150 but only have $100 in your account, your account will be overdrawn by $50 and your bank will charge you a fee. If you then make an ATM withdrawal for $50, your account will be overdrawn by $100 and you will be charged another fee. In this example, if the fee your bank charges for its standard overdraft practices is $30, you will pay a total of $60 in fees on $100 in overdrafts.

  • Overdraft protection plans. Your bank may offer a line of credit or a link to your savings account to cover transactions when you overdraw your account. Banks typically charge a fee each time you overdraw your account, but these overdraft protection plans may be less expensive than their standard overdraft practices.

So what’s different under the new rules?  Basically, your bank has to give you the option to choose how the bank will deal with an overdraft from you.  In the past, some banks automatically enrolled you in a standard overdraft program when you opened an account with them.  Now, the bank has to ask your permission and you have to opt in.  If you don’t opt in, beginning August 15th, 2010, your bank’s standard overdraft practices won’t kick in when you charge too much.  Instead, the transaction will typically be declined when you don’t have enough in your account to cover it.  You won’t be charged an overdraft fee, but you also won’t be able to complete the purchase or withdrawal, either.

If you have an existing account that was opened any time before July 1st, you are supposed to get a notice from your bank about their standard overdraft practices, asking if you want them to continue or not.  If you open an account after July 1st, you will be asked if you want to opt in or out when you fill out the initial paperwork. Whichever way you decide, you can change your mind at any time.

Warning:  If you write checks or set up automatic bill payment from your checking account, the new rules do not cover checks or automatic bill payments.  Your bank can still automatically enroll you in their standard overdraft practices for those types of transactions.  If you don’t want that to happen, contact your bank, but you may find that you don’t have the option to cancel.

As always, it pays to shop around when you open a checking account.  Banks could lose significant revenue if a majority of customers now opt out of overdraft protection, so down the road certain banks may decide to charge their customers new fees to make up for that loss of revenue.  Always be aware of the terms of service of your account, and that includes reading those updates that come in the mail! If you don’t like your bank’s terms, you may want to shop for a bank whose fee structure you like better.

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