Controlling overdraft fees could be next bill on the horizon

Bank overdraft fees could total $38.5 billion in 2009, and Congress may decide it's time to take action. Several bills are making the rounds in Congress to rein in this growing new revenue stream for banks.

With overdraft fees, banks allow people to overspend and then sock them with fees averaging about $35 per transaction. Since banks clear larger transactions first, account holders can find they have been charged numerous overdraft fees in just one day.

With more and more consumers turning to debit cards rather than credit cards, the risk of making a mistake and overdrawing a checking account continues to rise. One bill to be introduced by Senator Christopher Dodd will require banks to get permission from customers before allowing an overdraft. If customers decline, then the transaction will be rejected.

A similar bill is circulating in the House. While some want Congress to wait until the financial overhaul bill makes it to the floor of Congress, others think immediate action is needed to protect consumers.

Overdraft fees were just $10 in 1999 but shot up to an average of $35 in 2009. Moebs Services estimates that banks made about $18 million in 1999 on overdraft fees but expect them to make $38.5 billion in 2009. Essentially, debit cards are a new form of unregulated credit cards, but the big problem is that each transaction that exceeds the balance in a checking account can generate a $35 transaction penalty -- on top of the interest due on the loaned money.

Many banks allow customers to avoid these charges if they've made arrangements to link the account to an existing savings account or credit card for overdraft protection. But if the customer has made no such arrangement, the bank assumes the customer would prefer to pay the overdraft fee rather than have the payment "bounced" back for insufficient funds. That can also result in charges from the company that was expecting payment.

Obviously, the best way to avoid any of these fees is to keep accurate records of your checking account balance. But, as people use their debit cards more regularly, mistakes will likely happen more frequently.

The American Bankers Association released a survey that shows that 82 percent of customers did not pay overdraft fees in the previous 12 months, and of those who did pay a fee, 96 percent said they were glad the payment was covered.

Did you pay overdraft fees this past year? Would you prefer to have an overdraft transaction accepted or rejected?

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score.

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