Banks Change Overdraft Policies

The Federal Reserve has announced that as of July 1, 2010 banks will have to get their customers’ consent before charging them overdraft fees on their ATM and/or debit card transactions.  Specifically banks will have to notify all new and existing customers about how they handle situations when an accountholder makes a charge or withdraws money using their debit or ATM card that exceeds their available balance.  Banks will have to give customers the option of having the bank cover the balance difference and incur the fee for the service.  If customers choose not to opt in and have the overdraft protection, the withdrawal or transaction that would cause them to exceed their balance would simply be denied.  At present many banks automatically allow the transactions to go through – even though the account does not have the funds to cover it – and then extend a loan to cover the transaction and charge the accountholder a fee. 

According to bank consulting firm Bretton Woods Inc.:

  • banks and credit unions collected more than $37 billion in overdraft checking account fees in 2008 alone
  • the average household has more than 12 overdraft charges per year
  • the average household pays more than $368 in overdraft fees per year

Many banks have no limit on the number of overdraft charges that can be levied against a customer per day or per year. 

Several large national banks such as Bank of America, JP Morgan Chase, U.S. Bank and Wells Fargo have already announced major changes to their overdraft protection policies to benefit account holders:

 

Bank

Policy Changes

To Take Effect

Bank of America
  • inform customers when a transaction would cause an overdraft on their account so they can choose to cancel the transaction if they desire
  • eliminate overdraft fees on charges that cause a customer to overdraw their account by $10 or less
  • limit the number of overdraft charges to no more than four daily
  • allow customers to refuse overdraft coverage (meaning that they can contact their bank to ensure that a payment is not made from their account – they stop the charge – if there is not enough money in their account to cover it).

In effect

J.P. Morgan Chase
  • process transactions chronologically (instead of adding each day’s total debit card and ATM transactions and processing the highest charges/debits first) so that you’re not charged fees on the most expensive transactions first
  • allow customers to refuse overdraft coverage

January 2010

Wells Fargo
  • eliminating overdraft fees for customers who overdraw their accounts by $5 or less
  • limit overdraft fee charges to no more than 4 per day

In effect

U.S. Bank
  • eliminate overdraft fees for customers that overdraw their account by less than $10
  • limit the overdraft charges to 3 per day per customer
  • allow a customer to cancel a transaction that would put them over their current balance (if it’s possible to know that given the vendor’s capabilities)
  • create an annual cap on overdraft charges that can be levied against any one account per year

January 2010

 

It is important that you monitor your bank account activity and manage your accounts to know how much money you have available before making purchases or paying for services.  Learn more about how to best manage your banked resources through our articles: How to Balance a Checkbook, Using a Debit Card and Your Bank and Bounced Checks. 

If you are not already familiar with your bank’s overdraft protection policy it’s important that you take the time to find out.  Review your bank account documents, visit the bank’s website, or call or visit your local bank branch to find out.  If you are not comfortable with your bank’s approach to handling your potential overdrafts consider looking into other potential banks. Use the following questions to take notes about your bank’s overdraft policies and fees.

Bank Fee Comparison Questions

  • Do I have overdraft protection for my checking account?  (i.e. will a transaction with my debit/ATM card be allowed to go through even if it would cause me to be overdrawn?)
  • How much am I charged per overdraft transaction?
  • Is there a limit to the number of overdrafts I can be charged per day?
  • Is there a limit to the number of overdrafts I can be charged per year?
  • Will you inform me when a transaction would cause me to overdraw my account?  If so, does it give me the opportunity to cancel?
  • What other fees am I being charged to hold the account?