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Customers still confused about overdraft protection

If you make a purchase with your debit card and overdraw your checking account, will you get hit with a fee? What if you overdraft because of an ATM withdrawal? Are you sure? 

According to a new study by the Pew Charitable Trusts, more than half the people who overdraw did not know they had signed up for overdraft coverage that would result in a fee. 

More than one-third of the respondents surveyed did not know their bank offered overdraft coverage until they incurred a penalty. 

“Many people didn’t feel they fully understood the bank’s policies,” says Susan Weinstock, director of Pew’s Safe Checking in the Electronic Age Project. “Forty-three percent said they didn’t think their bank’s policies were very clear about overdrafts.” 

How could this be? It’s been nearly two years now since the Federal Reserve required financial institutions to change their overdraft policies on debit card transactions. You must agree to be enrolled in an overdraft protection plan (that covers point-of-sale debit card purchases or ATM transactions) if there’s a fee involved. 

This opt-in requirement was supposed to clear up the confusion and prevent unintended overdraft charges. And yet, most bank customers still don’t understand how the system works. 

“The study confirmed the concerns we have about whether those who overdraft understand if they opted-in to overdraft protection,” Weinstock says. “More than half of those who had overdrafted didn’t think they had opted-in to overdraft coverage when they had.” 

Note: If you opt-in for the debit card overdraft protection plan and there isn’t enough money in your checking account to cover the ATM withdrawal or the in-store purchase, you’ll get hit with that $35 fee. If you do not opt-in for the coverage, the transaction will be declined – but you won’t pay a fee. Based on the Pew study, you'd be smart to check with your bank to see how your account is set up. Remember, you can change your decision about overdraft protection at any time.

Another interesting finding 
The bank customers in this survey overwhelmingly (75 percent) said they preferred to have their transaction declined if they had insufficient funds, rather than have it processed for a $35 fee. (That is the median price for an overdraft in the U.S. right now.) 

The Pew study also makes it clear that people don’t like to be hit with surprise overdraft fees. More than 60 percent of those who had paid an overdraft fee said this service hurts more than helps. About a third of those surveyed said they had closed a checking account because of such a fee. 

Are new rules needed? 
The Consumer Financial Protect Bureau (CFPB) is investigating checking account overdraft protection programs to see how they are impacting customers. 

As part of that process, the CFPB wants feedback on a prototype “penalty fee box” it designed for bank statements. This box would highlight how much you paid in overdraft fees and why. Comments are being accepted until the end of June. 

The CFPB also issued a consumer advisory about overdraft coverage. It’s short, simple and should help you figure out your overdraft status. 

Pew would like to see the CFPB issue a rule that would require all overdraft penalty fees to be reasonable and proportional to the bank’s costs in covering the overdraft. 

Money-saving tips 
The American Bankers Association says most customers don’t pay overdraft fees. And the Pew survey confirms that. About one in five of those surveyed (18 percent) said they had paid an overdraft penalty fee. 

Consumer Reports recently published a list ways to avoid overdraft fees: 

  • Decline overdraft protection. If you’ve already signed up, you can contract your bank to opt out. Your debit card will be declined if you exceed your balance, but you won’t get hit with overdraft fees. 
  • Link your accounts. Ask your bank to link your savings to your checking account for overdraft protection.  You might get hit with a transfer fee but it’s generally lower, about $5 to $10. 
  • Consider an overdraft line of credit. Any overdrafts will be covered by the line of credit. They will incur interest but you’ll probably pay less than overdraft fees. 
  • Budget better. Sign up for email or text alerts to know when your account balance falls to a certain level.  Balance your checkbook regularly and keep track of all checks you have written, plus debit transactions, automatic bill payments, and direct deposits.