Opting Out of Overdraft

Overdrafts can be a very costly way to transact business.  Of course most of us never really intend to overdraft our checking accounts, it usually happens unexpectedly just before a payday or as a result of an unexpected expense.  Financial Institutions treat overdrafts as a very short term loan and assign a fee for the transaction.  Many fees range between $30- 35 for each overdraft.  Once one transaction creates an overdraft, each subsequent transaction creates another and another until the balance in your checking account is restored.  It is not uncommon to see overdrafts come in multiples.

In an effort to help families overcome the overdraft fee monster, Federal legislation enacted in 2011 allows people to "Opt Out" of overdrafts.  This can help to stop the avalanche before it starts.  When you opt out of overdrafts, your debit card will be declined if it creates an overdraft for you.  If you are at your local grocery purchasing your needed items, at the checkout you will find that your transaction will not be processed.  At that point, you can put some items back and pay using your available funds. It stops the snowball of overdraft fees and keeps you in the black!

One thing to consider is that your transaction may be declined even if you have the funds in your checking account if there are holds placed on your account by virtue of a gas, hotel, restaurant or some other purchase that holds an amount to cover your transaction. 

Where opting out doesn't prevent a fee is when you have electronic bill payments or checks being submitted for payment.  The financial institutions may charge you a fee even if you chose to opt out.  In 2011, financial institutions earned an estimated $38.5 billion in fees associated with overdraft fees according to a Pew Study "Hidden Risks: the Case for Safe and Transparent Checking Accounts". 

Overdrafts can be the reason that people leave a financial institution and are prevented from opening new accounts because of a history of negative balances left at a former financial institution.  Fortunately, you can take action to protect yourself and keep your good name intact:

1. Know your balance: keep good records of transactions and verify that transactions are correct and unduplicated by reviewing transactions through online banking or reviewing your monthly statement. See details in your "Bank On It" lesson.

2. Know what Checksystems reports on you: get your free annual Checksystems report by requesting it at www.consumerdebit.com.

3.  Linking your savings with your checking may prevent unnecessary fees, but be sure to repay your savings as soon as possible to keep your emergency protections in place.

4.  Know your financial institution's fee schedule so that you can know how to avoid unnecessary penalty fees.

To learn more about the Opt Out Rule check out this article:
Opt Out Rule - Federal Reserve Board

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