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Only 1 in 5 opting in for overdraft protection

By Claes Bell ·
Thursday, November 18, 2010
Posted: 5 pm ET

It seems like the worst fears of the banks are being confirmed: Two months after new rules went into effect requiring banks to get customers permission to enroll them in their lucrative overdraft protection programs, only about 1 in 5 have done so:

The (Consumer Reports National Research Center) poll found that 22 percent have signed up to have their ATM/debit card transactions covered for a fee if they don't have enough money in their checking accounts to cover them. A large majority of poll respondents said they wanted the same right to choose whether to be covered by fee-based overdraft programs for check transactions.

"Now that banks are no longer allowed to automatically enroll customers into high-cost debit overdraft loan programs, the vast majority of consumers are saying 'no thanks,'" said Pam Banks, Senior Policy Counsel for Consumers Union, the nonprofit publisher of Consumer Reports. "Consumers shouldn't opt-in to high-cost overdraft loan programs because there are more affordable options available when checking account funds fall short. Bank customers should have the same right to choose when it comes to overdraft programs covering checks."

It's not hard to see why checking account customers are staying away. At an average of $30.47, overdraft fees are a high price to pay to have the bank spot you for one debit card purchase.

But the most interesting tidbit from the survey for me was this finding, which jibed with some of the conversations I'd had about overdraft protection lately:

Of those consumers who signed up to have debit card or ATM transactions covered for a fee, the poll revealed that 55 percent had experienced an overdraft in the past six months.

My colleague Greg McBride often likes to blow people's mind with the statistic that according to an FDIC study, in 2006, 93 percent of overdraft fees are generated by 14 percent of banking customers.

Probably a good portion of those 14 percent are among that fifth of respondents in the Consumer Reports survey who had signed up for overdraft protection, because they have come to rely on it as a regular short-term loan.

I'm sure some of these folks may just be fiscally irresponsible and careless, but I'm sure for a lot of regular users, as awful as it sounds, checking overdraft is their least worst option. After all, if you have bad credit and no savings, there's probably not much in the way of alternatives beyond payday loan shops and pawn shops, neither of which are exactly famed for their fair lending practices.

For those that want to make sure they don't get stuck at the register unable to pay for their merchandise, if you have other options, such as credit good enough to snag a lower-interest line of credit to cover overdrafts or a savings account to use as an overdraft cushion, there's no excuse for neglecting to take advantage of them. After all, when it comes to overdrafts, the banks' loss is your gain.

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1 Comment
November 19, 2010 at 4:25 pm

Actually, payday advance compares favorably to many consumer alternatives, that's why many people choose this option over others: $100 payday advance with $15 fee is 391% APR; $100 bounced check with $55.59 NSF/merchant fee is 1449% APR; $100 credit card balance with $37 late fee is 965% APR; a $100 off-shore Internet payday advance with $25 fee is 651.79% APR, and finally, $29 overdraft protection fee on $100 is 755%.