"Ask the Expert": Should I Opt In to Overdraft Protection?

Q: My bank keeps nagging me to change my overdraft preferences on my checking account. What’s the best option?

A: Starting July 1, consumers have to opt-in to allow banks to charge overdraft fees on certain financial accounts.

Previously, banks allowed customers to take cash out of automatic teller machines (ATMs) or make purchases from their accounts that exceeded their outstanding balances. But the fees charged to do so were steep -- often as high as $39 a pop. Legislators targeted the practice of charging overdraft fees as abusive, saying many consumers had no idea they were over their balance limits when they made transactions.

The new rule, issued by the Federal Reserve under Regulation E of the Electronic Fund Transfer Act, says consumers must consent, or opt-in, to overdraft protection starting this month. The rules affect individual and household accounts, including checking, savings, money market, and other financial accounts you can access using an ATM or debit card.

Banks have until Aug. 15 to receive opt-in/opt-out designations from customers on their accounts. If you don’t inform your bank of your preferences either way, it will just assume you’ve opted out of overdraft protection.

Note, however, that the new rules don’t cover business accounts. You may still be hit by charges if you rely on overdraft protection on your small business or other business account for cash-flow purposes.

Should you opt-in? If you sufficiently fund, and closely monitor, your financial accounts, there’s no reason to opt-in to overdraft protection.

But if you primarily use your account to pay bills and keep just enough on hand to make your monthly payments -- or if you share the account with a loved one and miscommunication has resulted in overdrafts in the past -- consider opting in to overdraft protection. A $39 fee is a small price to pay if you accidently underfund the account and your mortgage payment is rejected for insufficient funds. (In addition to triggering a fat late fee, a late mortgage payment would also ding your credit score.) There’s also the embarrassment factor: Are you prepared to have your card rejected because your account is $10 short?

Even if you don’t opt-in to allow overdraft charges on your checking account, you may see account fees increase anyway. Consumer advocates fear that “free checking” will die if banks aren’t able to make money off of consumers who rely on overdraft protection.

Indeed, the changes to the overdraft rule prompted many big banks to get out of the business altogether. Bank of America, the nation’s biggest bank, decided to drop its overdraft option for most customers even though it said eliminating overdraft charges would cost it roughly $600 million in revenue in 2010. (It’s estimated that financial-services companies raked in about $20 billion in overdraft fees last year.)

Before opting in -- or out -- of overdraft protection at your current bank, shop around at local and online banks and credit unions to see what perks may be available by moing your account to a competitor.