Overdraft Fees

Overdraft Fees

Overdraft Fees

In the past, consumers were not given any warning that they were about to exceed their credit limit and then charged an overdraft fee of $29 or more for the privilege of having the bank cover the purchase. Now, thanks to new rules by the Federal Reserve, lenders can no longer charge these fees without the consent of the account holder. You can decide what will happen when you take out a debit card to pay but don't have enough money in your checking account to cover it. The rule does not apply to paper checks and automatic bill payments, which may continue to be assessed an automatic overdraft fee. (Be sure to check with your bank for details.)

Your bank will send you an official notification that you need to provide authorization for overdraft protection. The implication will be that you will miss out on an important feature, if you don't give approval. But their fear tactic doesn't explain how the protection will impact you and may even imply that signing for the service is in your best interest. But is it?

If you don't authorize overdraft protection

If you try to make a purchase that will put you over your credit limit and have not authorized overdraft protection, the purchase will be denied. The same for purchases made with a debit card and ATM withdrawals from accounts with insufficient funds. Any action that would exceed your limit will be declined at the register or ATM unless you opt-in to the previously automatic overdraft protection coverage.

If you authorize overdraft protection

Although every purchase and ATM withdrawal will be approved without a hitch, those that put you over-the-limit will cost you. For example, go over your limit by more than $5 (up to five times a day) at some institutions and you will be charged $35 per transaction. In addition, if you don't rectify the negative balance within 10 days and you'll be charged another $20.

Alternatives to cover over-the-limit transactions

If you want to avoid the embarrassment and inconvenience of having a purchase declined, you have several options.

Electronic Alerts - A courtesy service may be offered by your bank or credit issuer that notifies you by email or text message when your account is nearing zero. You can be notified by email or text message.

Link to a Savings Account - Tie your savings account to your checking account to cover over-the-limit debit purchases or ATM withdrawals. There are fees attached to this protection, but is typically much lower than overdraft protection.

Emergency Cards - Carry a prepaid credit/debit card tucked away to use when you fall short on your traditional account.

If you are living on the edge and frequently max out your credit accounts, opting to accept overdraft protection may be what saves you in an emergency when your debit card is your only payment option. If you have other payment options, it may be in your best interest to decline overdraft protection. But the easiest way to ensure that you don't go over your credit limit is to monitor your accounts.

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