Two big banks have announced changes in their checking account overdraft fees that will end what consumer advocates have called "the $35 cup of coffee" - for some people, some of the time, starting either in October or early next year. UPDATE: Wells Fargo changes policy on overdrafts as well.
The $35 cup of coffee happens when you use your debit card for a small purchase without realizing that there isn't enough in the account to cover it, or that the deposit you already made is still being held by your bank and won't be available to cover your purchase. You end up paying for the cup of coffee AND a $35 overdraft bank fee.
Consumers pay an estimated $38 billion a year in overdraft fees on both checks and debit purchases. Bank of America and Chase announced changes that will reduce, but not end, overdraft fees. Both banks announced improvements in customer choice about overdraft features and fees that happen when using a debit card (but no new choices for overdrafts caused by checks). Chase will give every customer a real choice, and stop applying overdraft fees on debit card use to people who haven’t signed up for debit overdraft. Bank of America will use opt in only for new customers. Existing customers will have to turn the feature off by opting out. Both banks have also said that they will end overdraft fees if the account is overdrawn by $5 or less (Chase) or by an amount under $10 (Bank of America).
Here is what was announced and what it means for consumers.
Say no to overdraft fees on debit cards: Starting October 19, you can tell Bank of America to turn off the overdraft feature on your checking account for your debit card. You could still be charged an overdraft fee if you write a check for more than you have in your account, or write a check against a deposit that is being held under a check hold.
If you bank with Bank of America, mark your calendar and make sure you contact the bank on or after October 19 to say "no thanks, no way, take it away" to overdrafts linked to your debit card. While you are at it, ask the bank to turn this pesky feature off for your checks too, and see what happens. The bank hasn't promised to let consumers choose to turn off the overdraft feature for checks.
Starting next June, Bank of America will stop signing up new checking account customers for overdraft on debit unless the customer asks for it, or “opts in.” Existing customers apparently will still be stuck with overdraft unless they contact the bank.
Chase has announced a stronger improvement in customer choice. Starting in the first quarter of next year, Chase says it will change its debit overdraft program to an “opt in” process for all of its customers – including existing customers. That means, finally, that consumers won’t pay overdraft fees caused by debit card use unless the customer actually asked the bank to cover overdrafts. Neither bank has announced any similar customer choice improvement for overdraft fees caused by checks rather than by debit card use.
The Federal Reserve Board has been considering changing the rules for debit card overdraft fees to require either opt in or opt out. Chase’s announcement shows that a bank can give every customer a real choice using opt in. The Fed should issue its rule to require opt in for every bank overdraft program.
Both banks reduced the number of overdraft fees that will be charged on any one day—to four for Bank of America and three for Chase.
The two banks also promised to end overdraft fees when the amount that the account is overdrawn is very small. Bank of America has promised that if the account is overdrawn less than $10 for the day, there will be no overdraft fee. If the account is overdrawn by $10 or more, however, a consumer could still face up to four overdraft fees in one day, so four small debit card purchases totaling $10 more than is have in the account could still cost $140 in fees in one day. This change also starts October 19.
Chase has promised that if the account is overdrawn by $5 or less for the day, there will be no overdraft fee. If the account is overdrawn by more than $5, however, a person could still face up to three overdraft fees in one day, so three cups of coffee that put the account over by more than $5 could cost $89 in fees under the Chase overdraft fee schedule. Consumers will be protected from these fees triggered by debit card use if they don’t opt into the overdraft program.
Chase announced one more important change that should reduce the number of overdrafts. It says it will process debit card and ATM transactions as they occur during the day, instead of saving them until the end of the day and then processing the biggest ones first. When there is not enough money in the account, processing the biggest debits first results in a higher number of overdrafts and more overdraft fees.
If you bank with Chase, you'll have to wait until next year for all of these changes to start. Everything Chase has promised starts in the first quarter of 2010 (sometime between Jan. and March of next year).
Ask your bank to match these improvements. Other banks should make these changes. But consumers still need a fairer shake than we can get from hoping our banks will cut back on outrageous bank fees and bad programs after they get so big that they draw national attention. After the New York Times published the $38 billion overdraft fee figure, Senator Chris Dodd announced that he would pursue overdraft fee reform, an issue the NY Congressmember Carolyn Maloney has long pushed on behalf of consumers. President Obama and Congressional leaders are seeking to create a Consumer Financial Protection Agency to respond to problems like this before they grow to cost consumers $38 billion a year.
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