Personal Finance and Money Management

Overdraft penalty fees were, until recently, were automatic when a zealous consumer went on a shopping spree that put their credit card account over the limit. Overdraft fees could be upwards of $34 and imposed for simply going over by $1. But with new legislation recently enacted by Congress, written to protect consumers from unreasonable charges and fees, banks can no longer charge those fees without the account holder giving authorization. Many consumers may be confused when they receive official looking notification requesting that they provide authorization for overdraft protection. The request is often written in a tone to instill fear or to imply that it is in the customer’s best interest. But is it?

Consequences if you deny authorization
If you don’t agree to an overdraft protection program, purchases that will put you over your limit will simply be denied at the register. The same applies to debit card purchases and ATM withdrawals that would exceed the limit. It needs to be noted, however, that the new law does not apply to paper checks and automatic bill payments. These will continue to be assessed an automatic overdraft fee. (Be sure to check with your bank for details.)

Lenders continue to see the fees as a deterent for bad behavior, but there’s nothing shabby about the $37 billion in overdraft fees collected in 2009, according to the Federal Reserve. The FDIC reports 41% of those fees come from debit card transactions, 8% from ATM withdrawals. Financial experts are disturbed by the number of people who are living close to the financial edge and exacerbate their problem by paying a fee to have purchases approved, even when they are adding to their over all debt problems.

Other options to cover overdrafts
If you are one of the millions of consumers who are living on the edge and worry about going over your limit, there are several options that won’t incur a penalty fee. Electronic alerts can warn when an account is nearing zero, while linking to your savings account can supply the additional funds to cover the overage.

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Tags: Overdraft, Overdraft Protection