Most banks charge an overdraft fee for the service, but now everyone with a checking account, regardless of the balance, your income or who you bank with, will have to decide whether you want your overdrafts protected. It's part of recently-passed legislation called Reg. Eg. Rick Claypoole is director of Consumer Deposit Products at BBVA Compass.
"Today most banks have what would be called standard overdraft practices, whereby on occasion if a customer doesn't have enough funds to clear a transaction, the bank can pay that transaction into overdraft and typically charges a fee for that. What's changing with the amendment to Reg. E is now the bank has to get permission from the customer to initiate and clear that transaction and charge the fee. If they don't get that permission from the customer, they'll deny that transaction and you know, the bad news is the payment won't go through, the good news for the customer is they won't pay a fee, though, for the service, either."
Claypoole says it's important to let your bank know your decision.
"Today most people are automatically opted in to these services. With the change in the regulation, the bank has to get the customer's permission to move forward. If they don't get that permission, as of August 15th the bank will automatically opt out the customers going forward. So simply put, you essentially have a service available to you today, and if you don't tell the bank you want to continue it, you won't, going forward."
There are several ways to op-in—or out—of overdraft protection.
"Any banks that want to have the service available for its customers have to mail out a consent form, and probably a lot of listeners would be receiving those right now—the month of July—because the compliance deadline is next month, as I mentioned, August 15th. The banks are, in fact, mailing out the notification to the customer, to make them aware of the change. Most institutions will also allow you to make those changes on the phone, in the branch, online or via the mail just by returning the form that the bank mails to you."
Jim Kelley with ING Direct says a cheaper alternative to an overdraft fee is linking your checking account with a savings account. You'll only be charged a small transfer fee when you overdraw.
"Many of the banks have already agreed to stop some of the most egregious practices such as, you know, ordering the checks from largest to smallest and charging multi-overdrafts for each item. And so I think that's going to have a real impact on their income, but you have to remember it's only ten to 15 percent of all customers that were paying these fees. But it did generate almost $40 billion in total fees for the bank over 2009, so they're going to have to replace that income. I mean it didn't generate anything for us because we don't charge it. We've see a huge increase in customers coming to us and opting into our program of using an overdraft line of credit."