checking

Bank overdraft protection: Do you need it?

To salvage some of that revenue and serve customers who've relied on overdraft protection in the past, banks have mounted campaigns to convince customers to opt-in to overdraft protection, says Richard Hunt, president of the Consumer Bankers Association.

"Banks by and large are getting customers to (opt-in) for overdraft protection because it's a service (customers) are asking for and demanding," says Hunt. "When Aug. 15 does occur and someone is denied a transaction, that will be the best way to get people to sign up."

The pros and cons

If you're trying to decide whether to opt-in, here are a few pros and cons to consider:

Pros:

  • Overdraft protection ensures those who agonize over being humiliated when being declined at the register will be shielded.

    "The argument the banks make is that people don't want to be embarrassed," says Baker. "They're at the checkout counter or they're at a restaurant, and they don't want to have the person dealing with the debit card go, 'You don't have money in your account.'"
  • Overdraft protection can come in handy in emergency situations such as running out of gas or getting a flat tire.
  • It can provide a temporary, if expensive, float between paychecks.

Cons:

  • Considering how often many people use their debit cards, overdraft protection fees can balloon quickly, creating financial problems for consumers.

    "If you haven't been following your balance closely, you can end up going into an overdraft situation on a very small purchase, and suddenly you're liable for a very large fine," says Baker.
  • Better rates of interest for small, short-term loans can be found at payday lenders. Even with payday lenders' infamously high interest rates, a study last month by Moebs found the average customer who took out a $100 loan from a payday lender paid about $17.97 in interest and fees, compared to the $27 average for overdraft fees.
  • Many people would rather have a purchase declined and find alternative ways to make the purchase than be assessed an overdraft fee.

Opt-in alternatives

If you're looking for a less expensive way to ensure you won't be turned down for a purchase or face hefty nonsufficient funds, many banks and credit unions allow you to link your checking account to a credit card, savings account or line of credit.

"Anybody can slip up once, and that's the type of protection you'd like to have. In the event you do overdraw the account, it's just a matter of moving your money from one account to the other, not borrowing from the bank to cover the shortfall," says McBride. "And the charge for that is very nominal -- about $10 -- based on a survey we did in 2007."

One final note: If your bank charges you an overdraft protection fee after Aug. 15 and you haven't opted-in, you can contact the Federal Deposit Insurance Corp. or the National Credit Union Administration to report it. The new Consumer Financial Protection Bureau will handle enforcement of the rule once it's up and running.

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