New Regulations on Overdraft Fees: Should You “Opt-In”?

By: Ellen Frick, Outreach Coordinator, NHS of Baltimore

New regulations that banks must abide by are abundant these days. Not too long ago, certain information was made available to consumers about how long it would take them to pay off a credit card if they only paid the minimum. Now the Federal Reserve has put forth a set of rules governing overdrafts on debit cards. Expect your bank to begin making changes in the coming months as financial institutions must comply with the Federal Reserve’s guidelines by July 1, 2010. Bank of America has already decided to get rid of overdraft fees on debit cards by simply not allowing the purchase to go through if there is not enough money in your account.

Getting rid of overdraft charges seems like a good thing. No longer will we have to worry about accidentally spending thirty-something dollars on a soda or coffee. However, banks may begin shifting fees around in order to make up for the money lost in charging customers for overspending their accounts. Last year, banks made $20 billion in overdraft charges alone, so from a business standpoint they are likely to find other places to make that money back. For instance, we may begin to see a decrease in services such as free checking.

As per the Federal Reserve’s new mandates, banks must give customers the choice to “opt-in” to overdraft fees. This means that individuals must give consent in order to be charged a fee for overdrafting an account. An article in The New York Times suggests that it may be best to pass up overdraft protection as you could end up paying a lot of money in the end. When given the choice between expensive fees and a denied transaction, one would think very few people will opt-in to these fees. But some financial institutions speculate that consumers would rather be charged big bucks for something small like coffee than face the embarrassment of a declined transaction. This claim may not hold true during today’s tough economic times. However, it may be nice to have overdrafting (with fees) as an option if you have an emergency and do not have a credit card.

Keep in mind the other things you can do instead of opting-in to overdraft fees. One cheaper alternative that some banks offer is to arrange for money to come out of a savings account or credit card if you overspend on your checking account. And it is always a good idea to keep track of your funds by setting up internet or mobile banking and balancing your account.