Should You Opt for Overdraft Protection?

Thanks to new laws coming out of Washington, D.C., bank account overdraft protection soon won’t be mandatory. But before you decide to opt in or not — and you’ll have to make that choice by Aug. 15 — you might want to consider the following factors.

First, some facts: The reason Aug. 15 is such a big deal is because that’s when current bank checking accounts will no longer offer automatic overdraft protection. Unless you opt in to your bank’s overdraft protection program, it will no longer cover your ATM and one-time debit card transactions when there are insufficient funds in your account.

To millions of Americans whose banks have already deluged with them with notices this spring, asking them to “opt in” or “opt out,” this news may not come as a surprise.

The question now is, should you keep your overdraft protection or not?

The downside of avoiding such protection might be substantial. For example, if you opt out of overdraft protection, and bounce a check, it could hurt your credit. Banks do keep track of bounced checks and overdrawn accounts — too many of either and you may not be able to open a new account with your bank. (Under the new federal regulations, banks do have the right to honor automatic monthly payments and bounced checks — although the latter will still be noted by banks and might be held against you, credit-wise).

There’s also the potential shame, if that’s not too strong a word, of having your debit card purchase rejected at the counter should your account not have enough money to pay for the transaction. Banks used to cover such purchases… and then hit you with an up-to-$36 overdraft penalty for letting the transaction go through. Without overdraft protection, your bank won’t help you save face at the checkout counter.

On the flip side, taking advantage of bank opt-in programs can really empty your wallet. A 2008 study from the Federal Deposit Insurance Corporation points out that if you complete a $20 transaction that’s covered by your bank due to lack of funds, an average $27 overdraft fee turns that $20 purchase into a $47 purchase. If it takes you two weeks to get your account back over zero, the FDIC estimates that you’re effectively paying an annual percentage rate of 3,520%.

There is, after all, a reason why banks made $20 billion in overdraft fees in 2009, according to The New York Times. But the same FDIC study also points out that 93% of all overdraft fees comes from 14% of bank customers — who overdraw their bank accounts at least five times a year.

Your best move might be to avoid opting in while taking advantage of bank services geared toward keeping your account in the black. For example, Chase (Stock Quote: JPM) will text you when your bank account is nearly dry. Also, don’t rely on the balance you see at your ATM — bank funds are dynamic, and fluctuate all the time. If you have a big withdrawal scheduled to hit your account on a given day, don’t count on the numbers you see on your ATM slip. Instead, always keep a buffer of $300 or $500 to ensure that you’ll cover your withdrawals.

You have until Aug. 15 to make your choice. But if you’re a responsible bank customer, with a good handle on your finances, there’s really no reason to opt in for overdraft protection.

That’s one “insurance policy” that bank customers likely don’t need.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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