Overdraft Protection: To Opt In or Not to Opt In

Overdraft protection is changing due to the new Federal Reserve rules. You can now decide what will happen when you try to use your debit card for a purchase but don’t currently have enough money in your checking account to pay for that purchase.

Your bank probably used to just go ahead and cover the purchase you made with your debit card if you didn’t have enough funds in your account. This action of course was not to benefit you but rather the bank, who would then charge an additional overdraft fee ranging from $35 to $40.

Now thanks to the changed Federal Reserve rules, new accounts opened after July 1, 2010 and effective as of August 15 for pre-existing accounts, attempted debit card transactions with unavailable funds in the account will be automatically declined. To avoid this embarrassment, account holders have the option to “opt in” for overdraft protection. In doing so, the bank is authorized to cover transactions that would otherwise be declined and the account owner agrees to the additional fee.

This overdraft protection that banks are offering to customers is not cheap. Some banks are charging the $35 per transaction on overdrawn accounts up to five times a day (for each transaction), and then even more fees if your account remains in the negative for ten consecutive days.

Sure it might be embarrassing for a transaction to be declined, but it happens every day and many times throughout a business day. Don’t be embarrassed. Instead, follow some good financial practices before getting into that situation.

The biggest suggestion is to only use your debit card on purchases that you will actually write into and balance in your checkbook. Yes, it might be a hassle and annoying but then you will never be unaware of how much money you actually have to work with. For little purchases, use cash.

Carry with you emergency cash or an emergency pre-paid card or a credit card in those emergencies where your debit card is declined. That way you will be saving possibly hundreds of dollars in service fees from the bank. Coffee and lunch and other things really are not worth the amount the bank will charge you if you are overdrawn.

You could also find out if your bank offers to tie in your savings account to your checking account so that if you do overdraw, the money could just come from there – just make sure that there are no additional fees for this too.

The choice to opt in or out of this overdraft protection is up to you. If you want to save money though, I would suggest going with the ideas suggested and not letting the bank charge you for overdrawing on your account.