New federal rules have bank customers choosing to either opt in or opt out of overdraft protection plans.
Consumer Reports' personal finance expert Mandy Walker said customers should opt OUT because the average overdraft protection plan dings customers for $34 every time they break the bank.
"We think they are very expensive, short-term loans that essentially could be the equivalent of a triple-digit APR to cover your ATM or debit card transaction," said Walker. "Essentially, (consumers should) do nothing so that they are automatically un-enrolled from these programs."
Dave Miller, director of retail banking for First Tennessee/First Horizon Bank, said not all banks charge the same fees or write the same rules for overdraft protection plans. He said customers who opt into First Tennessee/First Horizon's overdraft protection plan pay only if they overdraw -- and the fee is $10-15, not $34. Customers who opt out will have their debit cards declined if they are about to overdraw.
He said in a difficult economy with lay-offs, pay cuts and emergencies, overdraft protection offers a safety net.
"If you make a mistake and don't balance your account, we're still going to pay your mortgage bill or allow you to withdraw funds from an ATM, and so it's a critical service for a lot of people," Miller said.
Banks have been making a killing off their customers' mistakes. According to RK Hammer Investment Bankers of Los Angeles and www.lowcards.com, a consumer advocacy web site based in Birmingham, Alabama, bank card issuers make 61 percent of their profits off of the interest they charge and 39 percent - a pretty nice chunk - from fees, including overdraft fees.
First Tennessee/First Horizon now blinks a warning on its ATM screens when a customer with insufficient funds tries to withdraw cash. The warning gives the customer the choice of either canceling the transaction or withdrawing the cash with a single, specified overdraft fee.
"The reason we do that is so that the customer has an option," said Brian Collins, head of First Tennessee's bank card center. "A lot of times, one of our customers might really need that cash. There might be an emergency."
Walker suggested these alternatives to overdraft protection plans:
* KEEP A CASH CUSHION IN YOUR CHECKING ACCOUNT. Of course, that requires discipline, and if you're having trouble with overdrafts, discipline isn't exactly your thing.
* SHOP ONLINE BANKING OPTIONS. Shop your bank's online services and compare any fees associated with online banking to the fees the bank charges for traditional banking.
* LINK CHECKING TO SAVINGS. "You may still be charged a fee for that, but it will likely be a lot less than the $34 these overdraft protection plans tend to charge," said Walker.
* NEVER USE YOUR CREDIT CARD TO DRAW CASH FROM AN ATM. Quite often, the annual percentage rate (APR) on your credit card for drawing cash is higher than the card's APR for purchases. You'll also have to pay some sort of convenience fee for the withdrawal.
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