Insufficient funds: Decline the transaction or pay an overdraft fee?
March 10, 2010
By now, most people are probably aware of the new credit card rules that took effect last month.
One of the new rules involves overdraft fees. Many banks allow credit and debit card transactions to go through, even if the card user is over their credit limit or has insufficient funds in their checking account. The transaction would process, and the card user would get hit with an over-limit fee. These fees are typically around $36.
Some people would go over the limit with a small transaction, like a latte. Add the over-limit fee to the cost of the drink, and you’ve got yourself once expensive latte!
The banks contended that this was a service to their customers and that customers would rather pay an overdraft fee than face the embarrassment of having their transaction declined at the register.
The new regulations require that banks have their customers “opt-in” if they want to continue to make purchases with insufficient funds and pay the overdraft fee. First, I would recommend that everyone keep careful records and know exactly how much they have left in their bank account or on their credit limit, so that overdrafts or declined purchases are never an issue to begin with. I would also recommend people suffer a little embarrassment rather than create even more debt with overdraft fees.
Bank of America has announced that they are going to stop courtesy overdrafts altogether. There will be no opting in. According to an article about this in the New York Times, “In the case of overdraft, 93 percent of the fees are generated by just 14 percent of the customers who exceed their balances five times or more a year, according to a 2008 study by the Federal Deposit Insurance Corporation.”
The article also said, “Last year alone, banks generated about $20 billion from overdraft fees on debit purchases and A.T.M. transactions, and $12 billion more by covering checks and recurring bills, according to Moebs Services, an economic research firm.”
That means a relatively small amount of people are paying a lot of money as a result of keeping poor financial records and making poor financial choices.
What do you think of Bank of America’s new policy? Would you rather pay an overdraft fee or have your purchase declined?
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