by Broderick Perkins
You debit card bank may have coaxed you into signing up for potentially expensive overdraft protection you don't need, if you manage your money well.
Before federal overdraft fee regulations were put in place last year, the vast majority of consumers, 74 percent of those polled said they would opt out of overdraft fee protection, according to the National Federation for Credit Counseling.
The opposite has occurred.
Economic research firm Moebs Services says the opt-in rate for overdraft fee protection is "75 percent and is rising."
Banks are projected to rake in $38.5 billion in overdraft fees in 2011, $2 billion more than the $36.5 charged in 2010.
During boom times, overdraft fees kicked in when you made a purchase that exceeded an amount in your checking or other account backing your ATM or debit card.
Federal regulations, effective since last year, say banks can no longer charge you overdraft fees for allowing a purchase to go through when there's not enough cash in your account to cover the purchase. Instead, they must refuse the charge, much as they did long before boom times.
Now, it's up to you to opt-in for overdraft fee protection, and it can be expensive.
That $3 mocha could end up costing you $27. Bankrate.com, says paying a $27 fee for keeping a $20 overdraft for two weeks amounts to paying an annualized interest rate of 3,520 percent on that short-term loan.
Wouldn't it be better to have the caffeine shakes one morning and be alerted to the fact that your account is empty, rather than pay an exorbitant fee?
In same cases, the soft economy is driving the short-term needs of cash poor spendthrifts who choose to take it in the wallet to satisfy urges for instant gratification.
Some consumers simply prefer having as a safety net the option of a short-term loan for extra funds to see them though until next payday.
It's risky and costly but old habits die hard. Others are simply accustomed to having overdraft fee protection -- if only, "just in case."
Consumer advocates, including the Center for Responsible Lending (CRL), say the massive sign up for overdraft fee protection is largely due to the massive marketing efforts of banks using guile to fill their vaults as well as under-reporting by the media.
"Recent comments in the media suggesting that Americans overwhelmingly choose this costly product are suspect, in part because they overlook millions of customers at banks that do not offer the costly option for debit card transactions. These reports also ignore the impact of heavy-handed and deceptive marketing by banks who have sold costly overdraft "protection" as a beneficial program," CRL reports.
CRL says lenders:
• Don't always tell consumers there's no fee for declining a debit charge.
• Present customers with a false choice between no overdraft coverage or a high-fee overdraft program.
• Imply that a debit card won't function correctly unless a customer opts in or that high-fee coverage has some advantage over lower cost options.
• Don't fully inform customers about lower-cost options, say, a link to a savings account that could be tapped to cover overages.
In addition to linking the debit card account to another account, the National Federation for Credit Counseling says there are additional options.
• Electronic statements. Sign up for email or text alerts that notify you when your balance is low, reaches a certain point or otherwise puts you in overdraft territory.
• Good record keeping. Record all withdrawals and purchases as they are made. Record all ATM and debit card transactions along with any paper checks and automatic withdrawals.
• Budget. Be frugal. If you don't know where your money goes, you can't cut spending. Create of budget of all your spend. Pad your checking account with a balance you won't exceed. Most consumers spend a similar amount each month.
• Adjust payment due dates. If payment due dates don't coincide with paydays, request a due date change. A little extra interest to cover the gap for the first month will be worth what it could cost you over time and help you organize your finances.