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.

The Washington Post yesterday reported on a topic we’ve covered in depth: increased banking fees.

Customers are paying more to maintain a checking account and withdraw cash from an out-of-system ATM, and when they bounce a check. To make up for declining revenue, many banks are boosting fees and are requiring higher minimum balances for many accounts.

The institutions also have made it easier for customers to spend more than is in their accounts — and then hit them with substantial fees, a practice so vexing to consumer advocates that the Federal Reserve is thinking of regulating it.

Bank revenue has plummeted on the back of foreclosures and rising credit card delinquencies. Now Congress has passed a law cracking down on arbitrary and excessive credit card fees. So the banks have been fighting back.

And the way banks and credit unions “fight back” is by raising fees on customers, particularly for easily-avoidable errors such as ATM and overdraft charges:

Bank of America this year raised the maximum number of times customers can get hit with overdraft fees from five a day to 10. On top of that, it began charging a one-time fee of $35 if the account remains in the negative for more than five days.

[...]

In a study of fees last year, Bankrate.com found that the average bounced check fee rose 2.5 percent from 2007 to nearly $30. The average ATM surcharge in 2008 was up more than 10 percent to almost $2.

Of course, there are a few steps you can take to avoid these sorts of problems:

• Make sure your checkbook is balanced and you know how much money is in your checking account.
• There’s no reason (other than laziness) that you should have to use another bank’s ATM most of the time.
• If your brick-and-mortar bank requires a high minimum balance in order to qualify for free checking, consider switching to an online bank with free no-minimum checking accounts such as Charles Schwab or E*Trade.

As we’ve mentioned before, some parts of the bill — like requiring larger print on credit agreements — give consumers a fair shake. But it also means banks may start charging interest on accounts that are paid on time and in full every month. That means punishment for people with sterling credit scores who have never carried a balance or paid a bill late in their lives.

From The New York Times:

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”

The Library for Economics and Liberty points out that the regulations would also tighten the credit market for high-risk borrowers.

For years, people who pay their accounts responsibly have enjoyed perks like cash back and frequent flyer miles. But with more annual fees and no grace period, it’s a fair expectation that fewer people with good credit are going to be willing to pay such a high cost for the convenience of using plastic.

A version of the bill passed the House of Representatives last week, but the Senate revision may end up being a little different. The key provisions are expected to pass without much change, so barring any surprises you can expect to see most if not all of the following changes once the legislation takes effect:

• Less tiny print: For starters, you can say goodbye to tiny and unreadable fine print: all disclosures must be in 12-point font or larger. This is such a no-brainer it’s hard to imagine anyone but magnifying glasses manufacturers opposing it.

• No sudden/arbitrary rate increases: When you sign up for a credit card, or any other loan, you expect to know the interest rate you’ll be charged. Recently, however, a lot of credit card customers have been surprised with arbitrary rate increases, even if they never missed a payment. Under the new law, if you are carrying a balance at 10% fixed APR, you’ll know that interest rate won’t change (unless your monthly payment is late, or it’s a promotional rate that expired). And if it does change, you’ll have at least 45 days’ notice, plenty of time to look around for a better card and interest rate.

• High-interest debt automatically paid first: Speaking of interest rates, paying off your highest-interest loans first is always a good idea. It can be hard to actually do that, however, when you have multiple interest rates on one credit card. If you got a cash advance on your card at a high interest rate, and also did a balance transfer at a lower rate, your credit card company can apply your monthly payments to the lower-rate loan. Under the new credit card reform bill, though, high-interest debt will be automatically paid off first, just as personal finance experts have recommended for years.

The bill includes other rules designed to keep teens out of debt, as well as some more technical regulations of the way interest is calculated on existing balances (US News has a good summary of the rest of the changes). Once the Senate finishes its add-ons and amendments, the bill is expected to be voted into law within the next few days.

Indiana Secretary of State Todd Rokita said the recession is an indication that not enough attention has been paid to educating people about finances and economics.

The story continues:

Two bills are in the General Assembly right now that, if they pass, would require all schools — grades kindergarten through 12th grade — to teach financial literacy.

Hopefully this initiative, and others like it in states around the country, will succeed.

If credit-card limits are decreased, consumers should pay off balances as quickly as possible, consider making online payments before the monthly statement arrives to reduce debt and weigh transferring balances to a card with a lower rate, said Jeff Blyskal, a senior editor of Consumer Reports. Blyskal, who is based in San Francisco, said consumers should beware of teaser rates and high fees when transferring balances.

So why are banks lowering credit limits? As the economy gets worse, and unemployment rises, more and more people are defaulting on their bills:

American Express’s charge-off rates of loans rose to 8.29 percent in January from 7.23 percent a month earlier, a 15 percent increase, based on Bloomberg data. Chase’s charge-off rates increased to 5.94 percent from 5.32 percent, a 12 percent jump.

Even people who have never missed a payment are at risk of losing their access to credit, as these charge-offs hit banks’ balance sheets at an already-tough time. Meanwhile, a new round of credit card reforms could actually make the problem worse, as the industry is still adjusting to new rules the Federal Reserve implemented in December of last year. From today’s Politico:

The lenders also warn that tougher action by Congress might backfire and force lenders to tighten credit just when consumers need it most.

“There is a serious risk that such actions could end up hurting the very people they’re trying to help because it limits the ability of card companies to lend to consumers and small businesses at the very time they can least afford it,” said Ken Clayton, managing director of credit card policy for the American Bankers Association. The trade association is leading the industry’s efforts on the credit card issue.

The bad economic environment has driven up the cost of credit card lending, despite what the Federal Reserve has done, Clayton argues.

For ordinary consumers, what does this all mean? First of all, don’t rely on just one credit card. Cards can be canceled without warning, leaving you without options. And if you already have several cards, don’t let them go unused for too long, as inactive accounts are more likely to be closed. Finally, keep in mind that if you’re running up against your credit card limit, you likely have less expensive options than an overdraft fee on your checking account.

As the AP notes, the credit card industry isn’t having a particularly good year:

Scrutiny of the industry comes at a time when consumers are defaulting at high levels on credit card bills.

Last month, Fitch Ratings said its index of charge-offs on prime credit card portfolios rose in December to its highest level in four years. The rate at which cardholders repaid outstanding balances, meanwhile, slowed to its lowest since mid-2004.

Charge-offs are loans written off as not being repaid.

While this legislation still faces many obstacles before it clears the Senate Banking Committee through the legislative process, it’s probably fair to assume that at least some elements of it will gain momentum—due to both consumer demand and because Sen. Dodd is the committee Chairman. It also serves as a good reminder to always read the fine print to avoid big penalties on your credit card.