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Don’t opt in for ‘courtesy’ overdraft

By Claes Bell, CFA · Bankrate.com
Friday, May 4, 2012
Posted: 5 pm ET

While it might save your bacon under extreme circumstances, "courtesy" overdraft is usually anything but. A new study from Pew Trusts shows incurring big courtesy overdraft fees is still very much a problem for many Americans.

According to the Pew survey, 18 percent of consumers have incurred an overdraft penalty fee in the last year. Of that group, 54 percent had overdrafted two to five times, and14 percent had six to 10 overdrafts.

Bankrate's 2011 Checking Survey found the average overdraft fee was $30.83, so 10 overdrafts would cost a consumer more than $300. No wonder the survey also found that 23 percent of overdrafters also ended up paying an extended overdraft penalty fee because they weren't able to pay off the negative balance fast enough. And I'm sure a decent percentage of those ended up missing the bank's deadline for repayment and had their account closed, got on ChexSystems' naughty list, and found themselves shut out of the banking system entirely.

Those results come despite a Fed rule that went into effect in 2010 requiring banks to get customers' OK before enrolling them in courtesy overdraft programs. If a customer doesn't opt in, the Fed rule says the bank has to simply decline any purchase that customer doesn't have the funds to cover, rather than temporarily covering the purchase and charging a big fee.

It seems like a no-brainer that people would decline courtesy overdraft if asked. In fact, in the Pew survey, 75 percent of those who'd experienced an overdraft in the last year said they'd rather just have a transaction declined rather than pay the fee.

But overdraft opt-in rules can't help people if they don't even know they're opting for overdraft. In the Pew survey, 54 percent of those charged an overdraft fee in the last year didn't believe they had opted in, and 8 percent didn't know.

If you're in either of those categories, it's worth going to the bank and verifying whether you're signed up for courtesy overdraft. If you don't want to be, ask to be removed from the program then and there. That way, you won't get any nasty surprises.

Now, as I wrote yesterday, I do believe people are getting better at avoiding NSF and other checking account fees, and I think the opt-in rule may be helping. In a 2008 study, the FDIC found a little over 25 percent of checking account holders were charged an overdraft fee, so the 18 percent figure Pew came up with is actually a little encouraging.

But 18 percent is still an ugly number when you consider the consequences of overdraft, especially because consumers making less than $30,000 a year were almost twice as likely to get hit with a fee, according to the Pew study.

What do you think? Have you been hit by an overdraft lately? Is "opt-in" enough, or does the CFPB or another government agency need to step in with stronger restrictions on overdrafts?

Follow me on Twitter: @ClaesBell.

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2 Comments
Carlra
May 08, 2012 at 1:10 pm

Why does overdraft exist in the first place? If you don't have the money, you shouldn't buy it.

Mark Kreider
May 04, 2012 at 9:23 pm

Just last week my bank paid an overdraft on my account. Ilooked thru my records as i was sure that i opted out on overdrafts, sure enough, there it was "plain as day" no overdraft protection. So i called the bank and was told that because it was a "recurring charge" its not a part of whats covered under the opt out clause that i had signed and therefore if it were to happen again, i will be charged an overdraft protection fee. They did however credit my account the $38.00 this time as i was under-informed as to thier protocol.