Overdraft fee replacement worse than the original

Ugh. Did we just manage to get one annoying, expensive bank fee out of our hair only to turn around and find another one staring us in the face? Yes, we did, according to MSNBC's Red Tape Chronicles.

Here's the short version. The Federal Reserve is cracking down on banks that are slapping their customers with overdraft charges of up to $35 if they overdraw their account by even a few dollars. Beginning this summer (July for new account holders, a month later for existing customers), Americans will have to choose to be part of this racket. (Think about it; If you spend $10 you don't happen to have on lunch with friends and get charged $35, the bank is essentially loaning you that $10 at a 350% interest rate.)
With terms this onerous, the only way the banks could make people voluntarily want to sign up for overdraft "protection" would be to make it the less unpleasant option. Unfortunately, as cynical as it sounds, this is exactly what some appear to be doing.

What banks have started doing instead of charging a $35 "overdraft protection" fee is charging -- are you ready for this? -- a $35 "insufficient funds" fee. You get charged the same amount, and your card won't even be accepted for purchase.

Other banks are creating overdraft fee tiers, in which you pay less for the first overdraft than for the fourth one and so on. Consumer Reports describes some of these programs. While we're in favor of a system that doesn't punish a one-time slip-up to the same degree as repeated overdrawing, we're leery of adding yet another layer of complexity to a system that many people don't seem to understand.

MSNBC raises the concern that consumers won't understand why they're still being charged $35 for trying to spend more than they have in their account even after opting out of their bank's overdraft protection. This is certainly possible, especially since, according to the article, it can be tricky and take at least one follow-up call or visit five days after requesting the removal of overdraft protection to confirm that your request was processed.

Another complication is the fact that some merchants don't take the money out of your account right after you pay. In this case, you could make a purchase and then later check your bank balance, find it in the black and go about your business. But if you'd assumed incorrectly that the initial purchase had been debited when in fact it had not, you could get caught with a negative bank balance when that initial debit initially, belatedly comes out.

Of course, the obvious solution here is just to keep track of how much money is in your account and not make a purchase by check or debit card if the purchase amount is larger that the amount you have left.

A close second would be for banks to warn you before you're about to trigger an overdraft and let you decide if you want to eat the fee or not. This, while still expensive, would remove the "gotcha" element that has so infuriated hard-working Americans. New York Senator Chuck Schumer is trying to advance legislation that would force such point-of-sale warnings.

Until then, though, if you can't manage to stay out of the red, your best bet might be to link your checking account to a savings account via a program that will trigger an automatic transfer from savings to checking if you're about to overdraw. This service isn't free; banks generally charge 10 bucks a pop or so, but it beats paying an extra $35 for a cup of coffee. We talked about the benefits and drawback of these systems earlier.
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