ATM and Debit Card Overdraft Protection: Should You Opt In?

Most consumer advocates recommend against getting overdraft protection for ATM and debit card transactions.

By , Attorney

If you want to get overdraft protection for debit card and ATM card transactions, you must opt into your bank's coverage. With overdraft protection, your bank will allow debit and ATM transactions to go through even if you don't have enough funds in your account. Sounds good, right? Not so fast. Overdraft protection is a big money maker for the banks, and has disadvantages for consumers, like high fees.

Read on to learn more about overdraft protection and whether you should opt in or out. (To learn more about debit cards, see Different Types of Credit & Debit Cards.)

What Is Overdraft Protection?

An overdraft occurs when you write a check, use a debit card or ATM card in a transaction, or make an automatic bill payment for an amount greater than the balance in your checking or savings account

Overdraft protection is a service offered by most banks, credit unions, and financial institutions as part of your checking or savings account contract. With overdraft protection, if you use your ATM or debit card for a purchase, or write a check, but don't have sufficient funds in your account to cover the transaction, your bank will allow the transaction to go through.

This protection doesn't come for free, however. Banks charge a hefty fee each time you overdraw your account—fees of up to $38 per transaction are not uncommon.

New Law: You Must Opt In for ATM and Debit Card Transactions

Prior to 2010, many banks and financial institutions automatically enrolled their customers in overdraft protection programs. Often you had to affirmatively say "no" in order to end the coverage. That changed in mid-2010. Now, if you want overdraft protection for standard debt and ATM transactions, you must affirmatively opt into the program.

These rules don't apply to writing checks or automatic bill payments. If you don't want overdraft protection for writing checks with insufficient funds or automatic bill payments, talk to your bank.

Should You Opt In?

There are several reasons why most consumer advocates recommend against opting into overdraft protection.

High Fees

In 2017, the typical overdraft fee was around $34 according to the Consumer Financial Protection Bureau (CFPB). And a 2013 study done by the CFPB found that people who have overdraft protection pay significantly more bank fees than do those without coverage. On average, those with overdraft protection paid $196 per year in bank fees. Those without coverage paid, on average, just $28 per year in bank fees. (You can read the study on the CFPB's website.)

Here's an example demonstrating how overdraft protection can get pricey.

Example. Let's say you have overdraft protection. You go to your local coffee shop and charge a cup of coffee for $2. You don't have enough funds in your account, so your bank allows the transaction to go through and assesses a $30 overdraft fee. Later that day, you buy lunch for $10.00, and another $30 fee is assessed. That night, you take your kids out for ice cream: $7 for ice cream, and another $30 fee. When you get your bank statement, you learn that you've paid $90 in fees to make $19 worth of purchases.

Overdraft Protection = Big Money for the Banks

The banks love overdraft protection. In 2011, 60% of banks' total revenue from checking accounts came from overdraft fees.

Unpredictability of Fees

The CFPB study found that banks used a confusing set of rules to determine how they impose fees, order consumer transactions, and set coverage limits. This makes it difficult for consumers to predict when and how overdraft fees will be assessed.

Higher Risk of Having Your Account Closed

If a consumer runs up multiple overdraft fees and ends up with a negative bank account balance, the bank will eventually close that account. Once your account is closed, it is much harder to get another account at a different bank.

According to the CFPB study, those with overdraft coverage are 2.5 times more likely than those who don't opt into coverage to have their bank accounts closed due to negative balances.

Have You Unwittingly Opted In?

Many consumers have unwittingly opted into overdraft coverage. If you aren't sure if you have overdraft protection, call your bank and ask. If you have opted in, you can immediately opt out. Then send a written letter to the bank, confirming your request to opt out of overdraft protection. If your bank won't cooperate and you've lost a significant amount of money due to the unlawful charges, consider contacting a lawyer to resolve the issue.

And remember, the bank can automatically enroll you in overdraft coverage for checks and regularly occurring automatic debts. If your bank won't allow you to keep an account without this coverage, you'll need to keep careful track of how much money you have in your account to avoid incurring fees.

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