Overdraft protection: Know the facts before you enroll

Consumer Reports magazine says that despite federal rules on overdraft fees that went into effect in 2010, banks are still pulling in billions of dollars from them.

$120 mistake – $506 in fees.

In February of 2012 the federal Consumer Financial Protection Bureau (CFPB) announced it was looking into overdraft programs. The focus was to examine the practice of processing daily checking transactions – checks, bill payments, debit-card purchases and ATM withdrawals – in order of size, starting with the largest first. An account can be quickly drained, and banks can maximize the number of overdraft fees.

Consumer Reports stated that a 2010 class-action lawsuit against a large financial institution in California, which resulted in an order that the bank pay $203 million in restitution to customers, highlighted how overdraft fees can spin out of control. One plaintiff, Erin Walker, an 18-year-old who had just opened her first bank account, was charged $506 in fees over a one-week period for an overdraft of about $120. The financial institution did that in part by ordering her transactions so that most of them – purchases of about $4 to $5 at places like Starbucks and Jamba Juice – were posted after larger purchases.

The CFPB is asking consumers to share their comments on how they’ve been affected by bank practices, including transaction reordering and the terms of overdraft programs, and how they’re communicated. The agency is also seeking feedback on a “penalty fee box” that would appear on checking statements containing overdrafts. Weigh in on the CFPB’s site.

To avoid overdraft fees:

Link your accounts
Ask your bank to link your savings to your checking account for overdraft protection. You might get hit with a transfer fee, but it’s generally lower, about $5 to $10.

Consider an overdraft line of credit
Any overdrafts will be covered by the line of credit. They will incur interest but you’ll probably pay less than overdraft fees.

Budget better
Sign up for e-mail or text alerts to know when your account balance falls to a certain level. Balance your checkbook regularly, and keep track of all checks you have written, debit transactions, automatic bill payments, and direct deposits. Sites like Mint.com may be just the ticket to help you stay in control of your money.

New Federal Reserve rules give debit and ATM card users additional options regarding overdrafts. Banks, credit unions, and other financial institutions must offer you the ability to make decisions about overdrafts for transactions made with your debit or ATM cards.

For more information on financial matters from Michigan State University Extension educators, see the Personal Finances section of this website.

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