Will You Opt-in In for Overdraft Protection (and fees)?
Effective July 1, 2010, banks will no longer be able to charge fees for over drafting your account. That is, they cannot overdraft your bank account without your permission. From that date forward, you will have to opt-in to overdraft protection. If you choose to do this, you will be able to make a purchase, even if the funds are not fully available. Just as they do now, banks will charge a fee for the overdraft. This change is part of those proposed by the Federal Reserve last year as part of the Credit Card Act.
If you choose not to opt in for the protection, any purchases that are larger than your balance will be declined.
At first glance, this seems like a great idea. Why would I pay an overdraft fee? I will just spend what I have, and I will be declined for purchases larger than my account balance. Right?
Take a look at this scenario. A family man has $40 left in his checking account. He goes to buy milk, bread, diapers, and the basics. At checkout, the total is $35 (ok, this is a hypothetical!). With these new rules in effect, he may not be able to make the purchase. Some retailers preauthorize a flat amount to secure the purchase. For instance, when you use a debit card at the gas station, often times the card is preauthorized at say, $100. That way, the purchase is fully funded and reconciled with your bank for the actual amount. Hotels work the same way. In the new system, even if you have the purchase amount in your account, you may be declined for the transaction if you do not have enough money to cover the preauthorized amount of the purchase.
Ok, that is a far different reality. Who wants to be embarrassed at the point of sale?
Banks have been relying on the fees generated by overdrafts for years. The Washington Post published an article to examine how banks will recoup the losses based on the changes. You can read the full story here. Most experts agree that the free bank accounts will be the first target. Banks may begin to have minimum service fees, and ancillary fees based on the number of transactions in a month. Check out the changes with your financial institution. Bank of America will be eliminating overdraft fees in June for new customers and August for existing customers.
Filed under: Personal Finance Tagged: | banking, credit card act, overdraft protection, personal finance
