Imagine you're out with your friends at a coffee shop and you order a $4 latte using your debit card. You have a general idea of how much your bank balance is but not to the extent that you know the precise balance down to the last penny. In all actuality it turns out that a number of items have posted to your bank account throughout the day so your available balance is in the neighborhood of approximately $2. When you swipe your debit card at the coffee shop, the transaction goes through causing your bank balance to dip into negative territory. Depending on the financial institution, you will be charged on average $20-$40 each time the bank has to cover you as part of its overdraft protection. Many consumers are finding it especially difficult to stomach these hefty overdraft charges since they occur per charge...so if in addition to the $4 latte, you swipe your debit card for another $25 at the supermarket on your way home, you will pay an overdraft charge for that item too. Let's say for round-number purposes that the bank charges you $30 for each overdraft item it has to cover - in the earlier scenario, two swipes of the debit card totaling a net $29 have cost you an extra $60 in overdraft charges. Another way to look at it is that $30 in expenses has ballooned to almost $90 - 3 times as much - Ouch!
It's easy to see how these charges are painful for the consumer but it turns out that they are huge profit centers for the banks. According to research published by the Center for Responsible Lending
- 50Million Americans overdrew their checking account at least once in a 12 month period with 27 Million account-holders incurring 5 or more overdraft/NSF fees.
- Banks & credit unions collected nearly $24 Billion in overdraft fees in 2008
- Between 2006 to 2008 overdraft fee income for banks and credit unions rose 35%
The figures for 2009 are even more disturbing: overdraft income for banks and credit unions rose to approximately $38.5 Billion. The other alarming component of this statistic is that roughly 10% of the consumer base ends up paying almost 90% of the fee total.
So what's a consumer to do? In all honesty, as predatory as the overdraft fee structure is, ultimately it's the responsibility of the consumer to be vigilant and manage their accounts. These days you have to be your own best friend in particular when it comes to money matters. It may be difficult to imagine how you will ever manage to carve out that extra 15-30 minutes that are necessary to stay on top of your banking and finances, but the effort is well worth it considering the alternative which is far more painful with significantly more downside.
Beyond that, there are new laws that will go into effect as of July 1st for new banking customers and as of August 15th for existing customers. You can read about all of the components of the new laws by clicking on this link which will take you to the appropriate section dealing with this matter on the Federal Reserve website: CLICK HERE FOR INFO
The main things you need to know are:
- that you will have to opt in to accept your bank's overdraft policies. This means that if you swipe your debit card but you don't actually have the money in the account, your bank will still charge you, but they have your explicit permission to do so. If you don't opt in, then you won't be charged because any items in excess of your balance will be declined by the bank.
- the new rules apply to every day debit and ATM card transactions. They DO NOT apply to checks or automatic bill payments. In these cases the bank may automatically enroll you in their standard overdraft policy - your best bet is to talk to your bank to get the answers that apply to you/your account.
With all of the new reforms these days, it can be hard to keep track of everything but the only way you can really be protected is to do your due diligence as a consumer, and if you don't understand something, don't give up - ask reliable sources until you get an explanation that is satisfactory to you and is one that makes sense.
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