Should you opt in for overdraft protection?

You should expect a pitch like this in the mail from your bank: Opt in for overdraft protection for your debit or ATM card -- or you may be sorry. When your account contains too little or no money, your card could be denied!

People resoundingly said they didn’t like this “courtesy” overdraft protection when banks could foist it on them without asking. In a poll, they said they’d rather have their card declined than have an overdraft go through, costing them a big fat fee each time it did -- $35 or so.

So, now that it’s finally up to you, why would you choose to opt in to that type of protection? Hopefully you won’t. Here’s why:

Some background: This pitch from the banks is the result of new federal regulations that will kick in July 1. After that, your bank will no longer automatically honor your debit charge or ATM withdrawal if that would overdraw your bank account -- unless you opt in to so-called overdraft protection.

But who really benefits from this protection? No surprise here: It’s the banks. While you were paying that $35 fee so that your empty account would cover the price of that pack of gum, the banks were making an estimated $20 billion last year in overdraft fees on debit card and ATM transactions, The New York Times reports. If we all decline to opt in to overdraft protection, the poor dears will have to find another way to make that money.

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Some bloggers think opting in is the way to go. Sometimes it’s better to have the transaction go through and pay the fee, says our partner blogger Jim Wang at Bargaineering. (Note: The new rule doesn’t apply to checks or automatically recurring transactions. Your bank will still process those and charge you a fee for overdrafts even if you don’t opt in.)

Jim, who plans to opt in, argues that having to pay an overdraft fee is totally within your control, after all. “When people lambast banks for earning money this way, remember that this is a case where it’s the customer’s fault,” he wrote.

But, it’s become clear that banks have outsmarted even the more financially astute among us, and those fees have become an increasingly important source of revenue for them in recent years. "Banks and credit unions have become so sophisticated in driving up overdrafts that Americans now pay more in overdraft fees every year than they do for books, cereal or fresh vegetables," Center for Responsible Lending senior researcher Leslie Parrish said in an MSN Money article.

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When we get the pitch from our bank, we will NOT opt in. We don’t need this protection. Chances are, you don’t either. “According to a Federal Deposit Insurance Corp. study in 2008, 93% of overdraft fees come from the 14% of people who exceed their balances five times or more in a year,” The New York Times reports.

Instead of opting in for overdraft protection, thank your lucky stars that the bank will no longer allow you to overspend with your debit or ATM card. Also, keep these tips in mind:

• Keep track of your spending. Don’t rely on the balance shown at the ATM machine. It may not be accurate.
• Maintain a buffer in your checking account -- at least $100.
• Don’t cut the timing close. Thinking that the deposit you made in the morning will cover a debit purchase later that day can backfire.
• Don’t sign up for so-called “checking advance products,” or what some critics call the banks’ version of payday loans. Some banks let you borrow at an annual interest rate of 120% -- $10 for each $100 advanced to you -- if it’s paid back in 30 days. And it will be, because the bank can take the money you owe out of your account. Several big banks already offer these loans and more are expected to once overdraft protection is no longer automatic, a Bloomberg article says.
• If you really must, sign up for traditional overdraft protection, which links your checking account to a savings account, line of credit or credit card. It may cost a fee, but if you’re prone to overdrawing your account once or twice a year, it may be worth it.

Replacing automatic overdraft protection with the opt-in kind is something many consumers have longed for. Don’t be intimidated by some of the hard-sell techniques the NYT says banks are rolling out:

• Don’t opt in, banks say, and your maxed-out debit card won’t produce cash in an emergency, such as a car that conks out. Fine, you could respond, that’s why we have the cushion in our account. Or we’ll use our credit card.
• Don’t opt in, they say, and your debit purchase could be rejected in the event a gas station or hotel where you used it recently put a hold on additional funds in your account. (For instance, if you buy $25 of gas, the service station may actually put a hold on $75 until the transaction clears.) Again: No problem. We have a buffer or we can put such purchases on a credit card.

What’s your choice? Are you going to opt in or take the chance that you can manage your bank account responsibly?

Related reading:

• Don’t be duped by bounced-check ‘protection’
• Decline my debit card, please
• Never pay another bounced-check fee