Consumer Reports: Overdraft coverage

April 5, 2010 8:47:26 PM PDT
Overdrawing on your debit card can cost you big time. Many banks automatically cover overdrafts, but then charge hefty fees.

Last year alone those fees totaled 20 billion dollars.

New federal regulations are coming this summer that will require banks to ask before signing you up for overdraft coverage.

Should you say yes? Consumer Reports Money Adviser says not so fast.

Charles Berman had no idea he'd overdrawn his checking account.

Then he was hit with a flood of overdraft fees.

It started with a five dollar lunch that generated a 35 dollar fee.

"By the time I found out that I was overdrawing my account, I ended up with hundreds of dollars that I had to pay of overdraft fees for buying small items like a soda," said Charles Berman.

Currently, banks are allowed to automatically enroll you in overdraft coverage that can result in those hefty fees. But that's about to change.

Soon new federal regulations will require that banks get your permission to cover overdrafts.

Should you sign up? Consumer Reports says no. But some banks are pushing hard, sending brochures warning: "your debit card may not work the same way anymore" and "don't lose the flexibility" of overdraft coverage.

"It's true that overdraft coverage can help you in an emergency, say you need to have your car towed and don't have the money in your account. But the fees can be hefty, as much as 35 dollars each time," explained Greg Daugherty of Consumer Reports.

Far better, avoid overdrafts altogether.

If your bank offers it, sign up for electronic alerts when your account balance gets low.

"Another option is to link your checking account to your savings account or line of credit. The fees for that kind of protection are usually about 5 or 10 dollars per overdraft," said Daugherty.

As for Charles, he now checks his accounts frequently online to make sure he doesn't spend more than he has.

Automatic overdraft coverage has been controversial. Bank of America recently announced it's doing away with this coverage altogether on debit-card purchases.

The new federal regulations requiring you to sign up for overdraft protection will apply to new accounts as of July first and, for existing accounts, August 15th.