The End of Overdraft Fees

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Next week, overdraft fees will undergo a fundamental change. Starting July 1, banks will no longer be able to automatically charge you for overdrawing your account. Instead, you will have to opt-in to overdraft protection.

Until now, consumers have had relatively little say in the matter. Most banks automatically enroll clients in overdraft protection plans and charge a $30-$40 fee each time you withdraw money or make a purchase with your debit card that is for more than the amount you have in your checking account. In theory, this is a useful way to ensure that you can buy necessities even if you have little or no money in your account. But in practice, consumers are often charged $30 or more for buying a $2 cup of coffee when it would be cheaper to just have that purchase declined. Even worse, you may continue making purchases for days, racking up overdraft fees, before you check your statement and find out you’ve overdrawn your account.

At the end of last year, the Federal Reserve decided to overhaul this policy and force banks to give consumers the power to decide on overdraft protection for themselves. “The final overdraft rules represent an important step forward in consumer protection," Ben Bernanke, the Chairman of the Federal Reserve, said at the time. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."

Now, consumers will be able to choose whether to enroll in this protection plan, or abandon it all together. For those who decide to forego overdraft protection, anytime you overdraw your account, your purchase will be rejected outright.

The first downside of this change is that if you have a bank account at any of the major banks, chances are you’ve been receiving an incessant amount of e-mail about overdraft protection. I seem to get e-mails every other week from Chase (Stock Quote: CCF) pushing me to find out if overdraft protection is right for me.

More seriously though, this change has led banks to look for other ways to make up lost revenue. Big banks like Wells Fargo (Stock Quote: WFC) stand to lose more than $1 billion each year from overdraft fees and Bank of America (Stock Quote: BAC) stands to lose the most, about $2.2 billion. One option that these banks are rumored to be considering is eliminating free checking.

Nonetheless, the change that takes effect July 1 is undoubtedly a step in the right direction for consumers. You, of course, still have the option to enroll for overdraft protection, but there are more frugal alternatives that you can rely on now too. Yahoo Finance recommends that you sign up for payment alerts, which are offered from the majority of banks. This way you’ll know in advance if you’re bank balance is running low. If your bank doesn’t offer this, consider signing up for services like Mint, which allow you to monitor your expenditures and keep track of your balances. And in general, it’s always a good idea to carry some extra cash and some extra plastic as a backup.

—For a comprehensive credit report, visit the BankingMyWay.com Credit Center.

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