|
What is an overdraft?
An overdraft is when a bank pays a customer-authorized transaction even though the customer doesn’t have enough money in the account to cover it.
What is overdraft service?
Most banks will pay the overdraft anyway, assuming that the customer will repay the amount of the overdraft. There is usually a fee associated with that service.
How can customers avoid overdraft fees?
There are a number of options. In many cases, banks allow customers to link their checking account to another account (such as a saving account), and the money would be taken from the other account. Eligible customers can also link the checking account to an overdraft line of credit or a credit card account. Usually fees and interest are charged, but they are often less than paying an overdraft fee. Of course, the easiest way to avoid overdrafts is to keep track of your transactions and balance. You are also less likely to overdraw if you keep extra money in the account as a cushion. When your balance has fallen below an amount you have established, many banks will also offer to send you an alert by phone, email, or text message.
Why do banks pay overdrafts?
Studies have shown that people want important payments to be paid even if it results in an overdraft, and they are willing to pay a fee for this service. In most cases, these payments are bills, such as mortgage or rent, or for emergency help. They want to avoid the inconvenience and embarrassment of a late or bounced check. Furthermore, people often want the bank to pay a check (or an electronic or automatic transaction) because if it’s returned, the recipient may charge a penalty fee and reject their checks in the future.
Do all banks pay overdrafts?
Most banks pay checks, electronic transactions and automatic bill payments that cause an overdraft. Some banks also pay ATM and other debit card overdrafts.
Why aren’t overdrafts covered for free?
Overdraft fees are intended to be a deterrent to customers so they don’t overdraw their account on a regular basis. Banks also have to cover their costs and any risk. Just like fast food restaurants can’t give out free hamburgers, banks can’t give out free money to people who overdraw their accounts. If they made it a routine practice, they’d go out of business pretty fast. The fees for overdrafts cover the risk the bank is taking when it pays a transaction for someone who doesn’t have enough money in their account, in case they don’t pay it back.
What is the effect of the new “Opt-In” rule?
It deals mostly with debit card transactions: specifically ATM transactions and everyday debit card transactions made for purchases at a store or on the internet. Now customers must expressly agree, or “opt in,” before the bank can charge an overdraft fee for paying an ATM or everyday debit card transaction that will cause an overdraft.
What about automatic bill payments that have been arranged to be paid through a debit card? If the customer doesn’t opt in, will the payments always be returned when there isn’t enough money in the account?
The bank may, at its discretion, pay automatic bill payments charged to a debit card, but a fee will be charged even if the customer has not “opted-in” and agreed to pay a fee.
If the customer does opt in, will the bank always pay ATM and everyday debit card transactions even when there is not enough money in the account?
Unless the customer has signed up to link the checking account to another account, such as an overdraft line of credit, the bank does not guarantee that ATM and everyday debit card overdrafts will be paid even if the customer has opted in. These services are provided at the bank’s discretion.
If the customer does NOT opt in, does it mean that they will never overdraw their account using a debit card for ATM and everyday transactions?
No. There are limited circumstances when it will not be possible for the bank to avoid paying an ATM or other debit card transaction, even if there is not enough money in the account. Customers should not assume that because the ATM or other debit card transaction goes through that there is enough money in their account to cover it. The bank may not charge an overdraft fee, but the customer still must re-pay the bank to cover the overdraft in such cases.
How do customers opt in?
The rule permits banks to let customers opt in online, by phone, or in writing.
It depends on the bank. If the bank normally pays overdrafts for ATM and everyday debit card transactions (and then charges a fee), customers will receive an opt-in notice with directions.
Can customers opt in at the time of the debit card transaction?
For now, customers will probably not be able to opt in at the time of the transaction, but it will depend on the bank. If customers think they will want their ATM and everyday debit card overdrafts paid and are willing to pay for it, they should opt in before it is needed.
What would happen if banks didn’t offer overdraft coverage?
If too many restrictions are placed on overdraft coverage, some banks may decide that it is simply too costly to offer and will no longer offer the service. Customers with no money in their accounts will have their payments denied.
How is the price of an overdraft fee determined?
This is a proprietary decision that each bank makes for itself, taking into consideration the risks and costs of providing the service, as well as competitive forces.
Why can’t the fee be proportional to the amount of the overdraft?
Again, this is a proprietary decision that each bank makes for itself, taking into consideration the risks and costs of providing the service, as well as competitive forces. Besides, the fee is intended to be a deterrent to customers so they are careful not to overdraw their account on a regular basis. The fee has to be high enough to discourage overdrafts.
Why do banks oppose limits on overdraft fees?
Banks need to be able to cover the risk of providing the service or they may cut it altogether. Then, even customers who want it won’t be able to get it.
Do many people actually overdraw their accounts?
According to ABA’s annual overdraft survey conducted by an independent market research firm (Ipsos-Ried) in August 2009, 82 percent of bank customers did not pay an overdraft fee in the previous twelve months. That’s up two percent from 2008.
|
|
