Overdraft protection: ‘One of the worst deals’

Would you buy a $40 latte?

Of course you wouldn't.

But that's exactly what your bank is setting you up to do when it pushes overdraft protection for your debit card and ATM transactions.

For years, banks have charged as high as $35 if you spend more than the balance in your checking account, hence the $40 latte. This "free protection" was actually a thinly veiled excuse to sock customers with a huge fee.

According to the Consumer Federation of America, fee-based overdraft programs cost customers $23.7 billion each year.

Debit cards generate the most revenue; the average debit card overdraft is less than $17 but triggers an average $34 fee, or twice the short-term loan amount.

That's a steep price to pay to avoid the embarrassment of having your debit card turned down, which costs you nothing.

Last summer, consumer groups finally convinced the Federal Reserve to step in.

But the Fed didn't end overdraft protection. It just required banks to disclose terms of its overdraft fees and obtain your permission (or "opt in") before they can ding you.

Some banks, notably Bank of America, responded by eliminating overdraft fees altogether. Others redoubled their marketing efforts to scare you into opting in.

"The banks marketed this as, if you're caught in the middle of the night in a rainstorm on a country road where you need to put gas in your car, you want to be sure your debit card goes through," says Jean Ann Fox, director of financial services for the Consumer Federation of America. "The problem with this dire emergency scenario is the computer doesn't distinguish whether you're triggering a $35 overdraft to buy a newspaper or to fix your flat tire in the middle of the night."

Consumer groups insist the Fed didn't go far enough to rein in this onerous practice.

It does not, for example, require banks to treat overdraft fees as a finance charge, which would force them to quote the APR for the cost of this loan, the same way they're required to do with credit card and loan documentation.

"Therefore, consumers don't get a clear price signal so they can decide, would I rather sign up for the bank's overdraft line of credit and agree to pay 18% APR or do I want to opt in for paying an overdraft fee, which is essentially 3,000-odd percentage?" Fox says. "This is a spectacularly bad deal, one of the worst deals out there."

On a positive note, if you did opt in, you can just as easily opt out at any time.

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