New overdraft rules and you

New overdraft rules for checking accounts go into effect over the next few weeks, and they’re spurring a raft of mail from banks urging consumers to “opt in”—and often warning of potentially dire consequences if they don’t.

What are these new rules, how will they affect consumers and what should you do about them?

New rules: Responding to consumer complaints about burgeoning overdraft charges, the Federal Reserve announced that it would bar banks from automatically enrolling consumers in some types of overdraft protection plans for their bank accounts.

These plans allow banks to approve a check or debit charge to a customer’s account, even if the charge causes the customer’s balance to go negative, and then assess an overdraft fee of as much as $39.

Banks argue that the plans are a consumer service, preventing customers from being embarrassed (or harmed) by a denied charge at a restaurant or gas station, for example.

But consumers complained that they had no idea they could spend more than they had in their accounts when using a debit card because they were enrolled in the plans without their knowledge, and the overdrafts were “approved” (and triggered big fees) without their being alerted that the account had insufficient funds.

The Federal Reserve rules take effect July 1 for new accounts and Aug. 15 for existing accounts. The rules do not stop banks from covering overdrafts. But they bar banks from charging overdraft fees on ATM and point-of-sale debit purchases unless the consumer has actively enrolled in the overdraft protection service.

Bankers say consumers should opt in to overdraft protection to avoid having a charge denied for insufficient funds.

“This is not a one-time opt-in at the point of sale,” says Nessa Feddis, a spokeswoman for the American Bankers Association. “It’s a general opt-in. If you don’t do it, you could have a debit purchase denied.”

Other options: There are other options, and most of them are far less expensive than allowing the bank to approve an overdraft at $39 a pop.

Consumer advocates suggest that you link your checking account to a savings account or a credit card. This type of arrangement typically results in a charge that is a fraction of what overdraft protection plans cost, says Leslie Parrish, senior researcher at the Center for Responsible Lending in Washington.

For instance, most banks will charge a one-time fee of $5 to $10 to transfer money from a linked savings or credit-card account into your checking account. That would cover all of the overdrafts made in a day.

If you triggered five overdrafts, for example, this would still just cost $5 to transfer the money versus $195 ($39 times five) with a traditional overdraft program.

If the money was transferred from a credit card you’d also face interest charges, but those charges are likely to be minimal if the overdraft is repaid quickly.

There are other options out there, too. Jim Kelly, chief operating officer of ING Direct, says his bank offers a better deal. If you set up an overdraft line of credit at ING to cover your ING checking account, there’s no transfer fee.

In this case, you are simply charged for the money you use at a 7.25 percent rate. Someone who borrowed $100 for 10 days by overspending on a debit card would consequently spend about 20 cents, he says.

Customers do have to apply and have decent credit to get an overdraft line of credit, Kelly says. If they don’t have that line of credit set up, the bank declines charges when there are not sufficient funds in the account to cover them, but doesn’t charge customers to do it.

“The bulk of our customers don’t use it. But it’s a convenient way to access an affordable credit facility if you do,” he says.

Exceptions: The new Federal Reserve rule will not stop all overdraft charges, however, even for those who do not opt in to overdraft protection programs.

That’s because the agency will allow banks to cover “regular” payments and debits, such as the automatic payment for your mortgage or gym membership, and charge a fee if that payment causes you to overdraft.

In addition, the Fed did nothing about one of the practices that consumer groups find particularly egregious, that of “reordering” how transactions are processed from highest amount to lowest amount, regardless of the order that they reached the bank.

Banks have said this practice is a service aimed at ensuring that customers’ most important payments, such as the rent, are covered. But consumer groups say it’s a thinly veiled plot to boost the number of overdraft fees the banks can charge by draining the account with the biggest transactions first, increasing the chance that your other transaction, no matter how small, will trigger additional overdraft fees.

What you should do: If you are among the 20 percent of consumers who occasionally overdraw your checking account, you should become familiar with the terms of your bank agreement.