Closing the Door on Overdrafts

New rules ban fees unless you opt for protection when you withdraw more money than you have.

Editor's note: This story has been updated since it was published in the June issue of Kiplinger's Personal Finance.

Even the goliaths of the banking world are among those trimming overdraft fees in an effort to polish their tarnished image. More than 1,800 banks and credit unions are changing the way they handle overdrafts in response to the Federal Reserve's November 2009 announcement of its mandatory opt-in policy, according to a survey by Moebs Services, a financial-services-research provider.

The new rules went into effect July 1 for new accounts and will be effective August 15 for existing accounts. After those dates, unless you sign up for overdraft protection, your bank will not cover an ATM withdrawal or a debit transaction if you do not have enough money in your account. Opting in or out is not a one-time decision. You can switch back and forth and opt in or out at any time if you decide you made the wrong decision.

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Checks and recurring debits are not included in the new rules. This means that you could still be assessed a $35 overdraft fee or a $35 NSF (not-sufficient-funds) fee if you decline overdraft protection if you bounce a checks or can’t cover a scheduled automatic payment.

Many banks have already implemented changes. Bank of America will now decline a debit-card transaction if you do not have the cash. And B of A, Chase, Wachovia and Wells Fargo all warn you if an ATM withdrawal will overdraw your account -- although B of A, Wachovia and Wells Fargo will still let you proceed and incur a $35 overdraft fee. Many banks now cap the number of overdraft fees you can incur in one day and will not charge a fee if you overdraw your account by just $5 or $10. Citibank has a long-standing policy of declining ATM withdrawals and point-of-sale debits that would overdraw your account -- and the bank is happily pointing a finger at the Johnny-come-latelies.

If you do not keep close tabs on your checking-account balance, you may still be a good candidate for overdraft protection. Your best bet is to link your checking account to a savings or money-market account [see Kiplinger's Recipes for Quick & Easy Financial Fixes]. That way, if you overdraw your account, it will cost you an average of just $5 to transfer funds to your checking account (many big banks impose a $10 fee). Other options include linking your checking account to a home equity line of credit or a credit card. However, you should be aware that funds that are transferred from a credit card will be considered a cash advance, which carries a very high rate of interest.

It’s quick and easy to sign up for balance alerts, which warn you when your balance falls below a predetermined level or is inadequate to cover a bill that is coming due. You can receive them by email or text message. Transferring the necessary funds might be as simple as replying by text message after you receive a low balance warning.

Senior Reporter, Kiplinger's Personal Finance