Is overdraft protection worth it?

April 20, 2010 4:50:48 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.

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

Charles Berman had no idea he'd overdrawn his checking account and then he was hit with a flood of overdraft fees. It started with a $5 lunch that generated a $35 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," he said.

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," Greg Daugherty from Consumer Reports said.

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 each time," Greg said.

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 per overdraft," Greg said.

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

The new federal regulations requiring you to sign up for overdraft protection will apply to new accounts as of July 1 and for existing accounts, August 15.

Consumer Reports is published by Consumers Union. Both Consumer Reports and Consumers Union are not-for-profit organizations that accept no advertising. Neither has any commercial relationship with any advertiser or sponsor on this site.

(All Consumer Reports Material Copyright 2010. Consumers Union of U.S. Inc. ALL RIGHTS RESERVED.)


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