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Credit cardholders have enjoyed protection from over-the-limit fees since February this year, when new rules requiring cardholders to opt in for over-limit protection stepped into effect. Starting August 15, banks will be required to get customers’ permission to enroll them into debit card overdraft protection as well. The new rules are already effective for consumers opening new accounts.
Debit card overdraft protection currently is automatically provided by most banks, however, at fees that run as high as $39 per transaction. If a consumer makes several purchases before he or she discovers the overdraft, those fees quickly turn into real money. Once the new rules step into effect, banks are required to get consumers’ opt-in approval before charging overdraft fees for debit card transactions and ATM withdrawals. The new rules, however, do not require opt-in for overdrafts caused by paper checks or recurring charges on debit cards.
An estimated one in four people overdraw their checking accounts at least once a year, according to the FDIC. A small subset of consumers, i.e. 4 percent, are habitual overdrafters, racking up more than 20 overdraft charges a year.
The new rules for debit card overdraft protection are expected to have significant repercussions throughout the banking industry. Revenues from fees reached $37 billion last year, and a large chunk of that came from overdraft fees. As banks seek to make up for lost income, many are considering imposing monthly checking account fees or raising existing fees. Some analysts predict that checking account fees may end up reaching as high as $12 to $15 per month, and fees for returned checks may increase as well. Most banks are expected to offer consumers ways to lower the monthly maintenance fee, e.g. by waiving it for consumers who opt in for online banking or who have a mortgage, car loan or credit card account with the same bank. So keep a watchful eye on changes to your checking account terms over the next year as banks take steps to deal with the effects of the new overdraft rules.
Should you opt in for debit or credit card overdraft protection? Many banks are currently looking into lowering fees to make overdraft protection more attractive. However, for both credit cards and debit cards there are some viable alternatives already in place.
For debit cards, the best alternative to overdraft protection is to link debit card accounts with a savings account, so that overdrafts automatically are covered by the funds in the savings account. While banks do charge a fee for this so-called “linked account” protection, fees are considerably lower, typically around $5. Another alternative is to link a debit card with a credit card account with the same bank. From a budgeting point of view, of course, this is less desirable, as it makes it easier to lose track of one’s spending.
For credit cards, the disadvantages of over-the-limit protection go beyond cost. Pushing credit card balances to the limit pulls down credit scores significantly, which could seriously limit other financial options and make loans and mortgages more expensive. Financial advisors strongly recommend keeping credit card balances at 30 percent of the available limit, preferably lower.
Instead of taking out over-the-limit protection on credit cards, consider simply monitoring your credit card balance online regularly, so that you always know how close you are to the credit limit. Most card issuers also offer the option to sign up for text or e-mail messages to alert cardholders when the credit card balance gets close to the limit.
If you don’t opt in for overdraft protection, some banks and card issuers may still choose to honor over-the-limit charges without charging a fee, if it is a rare occurrence. The worst thing that can happen is that the transaction will be denied, which undeniably is inconvenient, and for some, perhaps an embarrassment. However, slip-ups happen to anyone, and in these days of ever-increasing credit card fraud, there are many other reasons for transaction denials than insufficient funds. So should it happen to you, consider it a reminder to check on your account balances more often; ultimately, many may prefer this to being charged high fees to spend beyond their means.
