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Finding solid footing as banks' overdrafts get overhauled

By Michelle Singletary
Thursday, March 11, 2010; A16

I've been noticing a lot of notice fatigue lately. By now, you may have become a bit overwhelmed with correspondence from your bank or credit union about mandated changes to your credit card account.

Well, I'm sorry to tell you this, but you've got to stay alert to even more changes concerning not just your credit card but also your bank account.

The Federal Reserve has issued new rules that will kick in July 1 giving consumers additional options regarding overdraft protection. Financial institutions won't be able to sign you up for overdraft services automatically. As with any such change, there's always some confusion. So the Fed has recently created an online publication on the new banking overdraft rules. I recommend, even in your information-overloaded state of mind, that you take the time to read the publication, particularly if you frequently use overdraft protection.

On http://www.federalreserve.gov, click on the link that says, "What You Need to Know: New Overdraft Rules for Debit and ATM Cards." You will find a summary of the new rules, including a sample of the notice you should be getting in the mail from your bank or financial institution.

If you haven't received a notice, you should expect it in the coming months. The notice is supposed to explain your choices concerning your financial institution's overdraft protection products, including fees.

The Fed's final rules prohibit banks and others from charging overdraft fees on ATMs and one-time debit card transactions, unless a consumer opts in to the overdraft service.

An overdraft occurs, of course, when you make a purchase without enough money in your account to pay for it. If you have overdraft protection, your financial institution will cover the transaction but charge you a fee.

When there are major changes like this, I don't just rely on what my institution says. I look for additional, unbiased information. The Fed's online publication nicely explains the difference between standard overdraft services and overdraft protection plans. With a standard service, your bank charges a flat fee each time you overdraw your account. In an overdraft protection plan, you may have a line of credit or link to your savings account.

Before you sign anything from your financial institution, visit the Federal Reserve's site and find out what you are agreeing to. Here's a synopsis of the new rules:

-- If you open a new account on or after July 1, your bank cannot charge you overdraft fees for debit card and ATM transactions unless you opt in.

-- Starting Aug. 15, if you are an existing account holder and have not opted in, your debit card and ATM transactions will be declined if you don't have enough money in your account.

-- At any time, you can choose to opt in or out of overdraft protection.

If you have a banking account, you have a decision to make. Which way should you go?

It depends on how disciplined you are. Having overdraft protection for the occasional slip-up won't break your bank. For many people, an irregular fee is not a big deal. But for others, this overdraft protection racks up fees they can't afford.

I was at my bank not too long ago when I overheard the soft whimpering of a nearby customer.

The woman was begging a bank officer to reverse some overdraft fees. She admitted that she had made some small purchases that had resulted in a domino effect with her account, triggering the fees. She told the officer she was out of work, and the fees -- several of them -- ate into money she needed for other necessary expenses. He would not budge.

For this customer, it would have been better if the bank had just denied the transactions rather than hitting her with onerous overdraft fees.

The ease of using a debit card allows people to swipe first and balance their account later. But a transaction of only a few dollars can end up costing quite a bit, especially when a single overdraft fee can be as high as $35.

Here's what I would recommend. Because you have the ability to opt out and then opt back in, try running your financial affairs for several months without overdraft protection. You may find that you become a better money manager without the false sense that you have a backup option.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

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