In the past, if you made a purchase with a debit card or withdrew money from an ATM but didn’t have the funds in your account to cover it, your bank would allow you to “overdraft” your account and charge you a hefty penalty for the privilege of doing so. This fee has been a cash-cow for the financial services industry – in fact, according to Moebs Services they collected over $30 billion last year in these fees.[1]
Those fees range from $10-$35 per transaction (the average is $26), which meant if you were out shopping and purchased several different items from different stores you may have ended up with hundreds of dollars in overdraft fees.
Moebs Services noted that while consumers all over the board paid these fees, just 10% of banking customers paid 90% of these fees, and the most concentrated group was consumers with credit scores under 590. In other words, those who have had other struggles with money (a low credit score is generally due to bankruptcy, missed or late payments and accounts in collections) are the ones paying the fees.
However, according to new federal regulations[2] this all changed on July 1, 2010. In response to these high fees the Federal Reserve is forcing banks to do away with these automatic charges on ATM withdrawals and debit card purchases. You now have to “opt-in” to be able to overdraft your account and the fees have to be clearly communicated up-front. The new law, however, does not apply to checks or recurring payments.
Because this is such a profitable fee for financial services companies many of them have started aggressive marketing campaigns to get you to opt-in. I have received letters from both of my banks recently encouraging me to sign up for this “valuable service” that helps you “avoid the embarrassment” of having your card declined.
Some groups[3] are predicting that this change in policy will have repercussions in other areas. Because these fees represent such a large chunk of profits, companies will seek to make these up in other ways. The most common concern is that free-checking will disappear unless you have multiple accounts or maintain a minimum balance. Unfortunately, a monthly service fee will most likely hurt those who paid the majority of overdraft fees in the past.
To avoid problems with your bank accounts be sure you don’t spend more than you earn, balance your checkbook on a regular basis and use services such as online banking to check your balance.
[1] http://www.moebs.com/AboutUs/Moebsinthenews/tabid/57/ctl/Details/mid/484/ItemID/75/Default.aspx
2 http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112a1.pdf
3 http://www.pressdemocrat.com/article/20100620/BUSINESS/6201132
Ryan H. Law, M.S., AFC
Department of Personal Financial Planning
Office for Financial Success Director
University of Missouri Center on Economic Education Director
239E Stanley Hall
University of Missouri
Columbia, MO 65211
573.882.9211 (office)
573.884.8389 (fax)
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