New overdraft rules are in full effect, leaving many consumers wondering if it’s best to opt into now optional overdraft protection or go without it. Learn what the Federal Reserve’s new overdraft rules are and how they affect your checking and savings account before you make a decision. In addition, find out about alternative ways to protect your accounts from overdraft fees.
New Overdraft Rules
Before the new overdraft rules, your bank could allow ATM withdrawals and debit card purchases, even if you didn’t have enough money in your account to cover the charge. Consequently, the bank would promptly hit your account with an overdraft fee of up to $34 for each transaction. The new law, however, requires you to opt-in to accept this protection. Otherwise, the bank must deny the charge or withdrawal that would overdraw your account. If you choose to opt-in, your bank will continue to charge you a fee for each overdraft.
Here’s how overdraft protection works: let’s say you enjoy a latte each morning at the corner coffee shop, costing you $3.50 a pop. While you think your paycheck cleared your account, it didn’t. When you swipe your debit card, you’re charged $3.50 and because you don’t have enough funds to cover the purchase, the bank charges your account a $34 overdraft fee. So now, that $3.50 cup of coffee costs you $37.50. And if you don’t catch the mistake in time and continue to charge purchases, you will incur further overdraft fees for each purchase you make.
The Alternatives
You may agree that some type of overdraft protection is a good idea. After all, stuff happens. Before deciding to opt-in for the automatic overdraft option, however, call your bank and ask if there are alternatives available. For example, some banks offer an annual overdraft protection service. You’ll pay a yearly fee for the service, but it’s nominal and often lower than a single overdraft fee.
The second option is to link your savings account with your checking account as overdraft protection. Many banks offer this as a free option for protecting your checking account from possible mishaps. If your checking account becomes overdrawn, money from your savings will automatically transfer to your checking account to cover the amount. Of course, you have to have enough money in your savings account to cover the overdrawn amount for this to work.
What to Do
If you have a savings account and checking account at the same bank, then linking the two accounts as free overdraft protection is your best bet. If this isn’t an option, then inquire about an annual overdraft program. If you rarely overdraw your account, then stay put – your purchases will be declined in an overdraft situation, but you won’t get hit with overdraft fees.
For more ideas on how to improve your financial health, check out Quizzle.com, where you’ll learn how to achieve your credit potential and get out of debt faster. And check out these other great money saving articles:
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