4 Things to Know About Overdraft Protection
Managing your bank account can sometimes be overwhelming. This is especially true when it comes to familiarizing yourself with your options for overdraft protection. This is a bank service that covers the cost of an ATM transaction or debit-card purchase in the event you don’t have sufficient funds. If you’re trying to decide whether overdraft protection is right for you, you’ll need to know a few things.
1. You’re being watched
Having that cushion in your bank account is comforting, but you’ll have more than just fees to worry about if you need to use the service. It’s important to know that dipping into overdraft too many times could possibly prevent you from opening another bank account. A consumer reporting agency called ChexSystems keeps track of consumer banking activity. This agency knows your check-writing history and whether you excessively overdraft.
2. Overdraft protection is your choice
Thanks to a Federal Reserve rule that became effective in 2010, your bank cannot charge an overdraft protection fee unless you opt into the service. In fact, the Consumer Financial Protection Bureau recently cracked down on an Alabama bank for charging overdraft fees to consumers who had not opted in for overdraft coverage. The bank was hit with a $7.5 million fine for its illegal actions in addition to its slow response time for correcting the situation.
If you do decide to opt in, don’t forget. A Pew Charitable Trusts report found that about half of consumers who choose to participate in an overdraft protection program forget they even signed up. Consequently, they’re surprised once they notice an overdraft fee on their banking statement.
3. You can opt out whenever you want
Know that you can also change your mind about your decision to use overdraft protection services. Bank customers are free to opt out any time they choose. However, this means you’ll have to make sure your checking account has enough funds to cover your purchases so that you won’t run the risk of having a transaction declined. The CFPB recommends linking your savings account to your checking account so that if your checking account is too low to cover a purchase, money from your savings account will automatically be transferred over to fill the gap. Note, however, that you might be responsible for transfer fees. As an alternative, you can also sign up for low balance alerts so that you’ll know when your checking account is too low.
4. Fees can be hefty
A 2014 Consumer Financial Protection Bureau study found that among customers who have chosen to opt in, charges from overdraft and insufficient funds comprise roughly 75% of their total checking account fees, averaging more than $250 annually. Monthly net checking account fees per account (which include maintenance for overdraft and insufficient funds fees) amount to roughly $29 per month. Millennials are most often hit with these fees. They are four times more likely than people 65 and over to have more than 10 overdraft fees annually.