A new set of Federal Reserve rules went into effect yesterday that now require banks to get your permission before you’re enrolled in overdraft protection. Before, your bank could enroll you without notice in an overdraft plan that would process the transaction but hit you with a fee for every ATM, check, and debit card purchase that exceeds your available balance. That protection often comes at a very high price, with the nationwide average for overdraft fees up to $27.50 per transaction.
As Consumer Reports summarizes:
Overdraft programs are really high-cost, short-term loans with quadruple-digit APRs. Most banks charge flat overdraft fees. So if your balance goes to zero purchasing even a $1 pack of gum with your debit card could trigger a fee of $35 or more. Once you’ve exceeded your balance, every purchase you make could generate another fee. And, some banks still impose long hold times before you can use the money from checks you deposit, which increases the possibility that you will overdraw your account.
To the extent that you can avoid overdrawing, you should take every precaution to maintain a safety cushion of at least $100 in your checking account. But since that isn’t always possible, there are better options out there for short-term loans if you find yourself in a pinch.
