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As of August 13 2010, bank rules for overdraft checking changed due to the Credit CARD Act. In the past, many banks extended overdraft checking to customers as a courtesy. Now you are required to opt-in to accept that protection.
So, should you opt-in to your bank’s overdraft checking options?
How Overdraft Checking Works
In the past, many banks automatically extended overdraft checking for their customers.
If you attempted to make a purchase with your debit card (either as a debit or a credit transaction), but did not have the money in your account to cover the purchase, the bank would extend you a loan to cover the transaction.
This was done without your permission, and resulted in NSF (non-sufficient funds) fees of $30 to $40 or more, depending on your bank.
This may have saved embarrassing moments out to dinner with a crowd. Or, possibly, permitted you to make a purchase you really needed, even if you didn’t have money in your account.
But it cost customers millions of dollars a year (and made banks equal amounts of money!)
New Regulations Require Your Consent
Now, banks cannot offer overdraft checking as the default option for a new checking account customer and, as of August 13, if you have overdraft checking “privileges,” they will be revoked unless you “opt-in.”
Banks are pushing the service, sending multiple notices to customers and using scare tactics to get customers to opt-in to overdraft checking.
But what you’re really losing is the chance that you’ll have to pay $30 to $40 or more in fees on a $5 purchase if you lose track of the money in your checking account and come up short of funds.
It’s important to note that new overdraft checking rules apply only to debit and credit transactions drawn from your bank account.
This means that your bank can still authorize automatic bill pay transaction and cash checks, if you have insufficient funds. The normal NSF fees and any additional fees will apply.
Benefits of Opting-In
The only benefit to consumers that opt-in to overdraft checking is access to money, at a high price.
Whatever your financial situation, it’s probably best to stay opted-out of overdraft checking. If you decide you want to opt-in at a later date, you can change your options at any time with a quick trip to your bank, a letter or a phone call.
What Happens If You Opt Out
When you opt out, you’re taking back control of your financial life, rather than letting the bank determine your financial destiny.
You may need to apply better money management to avoid embarrassing situations of having your credit card declined, but, in the end, you could save hundreds of dollars.
If you decide to stay “opted out” of overdraft checking, you’ll want to:
- Track your checking account purchases and withdrawals, either through an online bookkeeping program like Mint.com, Quicken, or by old-fashioned methods of a checkbook register
- Check your balance frequently online or through your smartphone to make sure your calculations agree with the bank
- Keep in mind that your available balance may not reflect funds coming into, or leaving, your account
- Remember that withdrawals and payments may not post in the order you submit them
Additionally, it’s a good idea to keep an emergency credit card on hand for those times when you do need a little bit of extra money to get your through to next pay day.
If you “opt-in” to overdraft checking, your debit and credit card transactions may clear even if you don’t have money in your account for the purchase.
The bank will then charge you an NSF fee, along with other possible fees. But even with overdraft protection, the bank can decline a transaction for insufficient funds at their discretion.
If you “opt-out” to overdraft checking, your purchase will be declined if you don’t have money in your checking account to cover it. You won’t pay any fees. However, you will need to present a different method of payment for your purchase.