ATM and Debit Card Overdraft Protection

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

By , Attorney · Northwestern University School of Law
Updated by Amy Loftsgordon, Attorney · University of Denver Sturm College of Law

Amendments to Regulation E, 12 C.F.R. Part 205, generally prohibit financial institutions from assessing fees for paying ATM and one-time debit card transactions that overdraw a consumer's account unless the consumer affirmatively consents to an overdraft protection program. (12 C.F.R § 205.17). So, if you want overdraft protection for debit card and ATM card transactions, you must opt into your bank's overdraft protection program.

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 but has disadvantages for consumers, like high fees.

What Is Overdraft Protection for ATM and Debit Cards?

An "overdraft" occurs when you 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. If you attempt an ATM or debit card transaction but don't have enough money in your account to cover it, and you don't have ATM and debit card overdraft protection, the purchase or withdrawal will generally be declined.

However, 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. Overdraft protection is a service most banks, credit unions, and financial institutions offer as part of a checking or savings account contract.

Of course, this protection isn't free. Banks charge a hefty fee each time you overdraw your account—fees of about $36 per transaction aren't uncommon.

You Must Opt In for ATM and Debit Card Transactions

In the past, many banks and financial institutions automatically enrolled their customers in overdraft protection programs. Often, you had to affirmatively say "no" to end the coverage. That changed in July 2010. Now, if you want overdraft protection for standard debit and ATM transactions, you must affirmatively opt into the program. (12 C.F.R § 205.17).

These rules don't apply to 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. (If a financial institution pays a check into overdraft, it is allowed to charge a fee even if the customer has not opted in because checks aren't covered by the mandatory opt-in or fee prohibition rules.) (See 12 C.F.R. § 205.17(b)).

Opt-In Requirements

Generally, federal law prohibits a bank or other financial institution from assessing a fee or charge on a consumer's account for paying an ATM or a one-time debit card transaction as part of the institution's overdraft service unless:

  • you get a notice in writing (or, if you agree, electronically) explaining the institution's overdraft service
  • you get a reasonable opportunity to affirmatively consent (opt in)
  • you affirmatively consent (opt in) to the service, and
  • The institution gives you a confirmation of your consent in writing (or, if you agree, electronically), including a statement informing you of the right to revoke your consent. (12 C.F.R § 205.17).

The law requires the consumer to "affirmatively consent" to overdraft fees. The bank can get your consent in the following ways.

  • By mail. For example, if your bank gives you a form to fill out and mail to affirmatively consent to the service.
  • By phone. The bank can offer a telephone line you can call to provide affirmative consent.
  • By electronic means. The institution can provide an electronic means for you to affirmatively consent, such as a form that can be accessed and processed on its website, including a check box and confirmation you can click on to indicate your consent.
  • In person. The bank can give you form to complete and present at a branch or office to affirmatively consent to the overdraft service.

Applicability of the Opt-In Law

The opt-in requirement applies to:

  • any ATM transaction, including withdrawing cash, interaccount transfers, and bill payments at any location, such as bank-owned and operated, third-party, proprietary, and foreign ATMs, and
  • any one-time debit card transaction, such as at a store, online, or by phone.

Should You Opt In to Overdraft Protection for ATM and Debit Card Transactions?

Most consumer advocates recommend against opting into overdraft protection. Here's why.

High Fees

In 2022, the typical overdraft fee was around $36 according to the Consumer Financial Protection Bureau (CFPB). One CFPB study 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.

Example. Let's say you have overdraft protection. You go to your local coffee shop and charge a cup of coffee for $5. 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 $20, and another $30 fee is assessed. That night, you take your kids out for ice cream: $10 for ice cream and another $30 fee. When you get your bank statement, you learn you've paid $90 in fees to make $35 worth of purchases.

Overdraft Protection = Big Money for the Banks

Banks love overdraft protection. Over half of banks' total revenue from checking accounts generally comes 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 accumulates multiple overdraft fees and has 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.

And remember, the bank can automatically enroll you in overdraft coverage for checks and regularly occurring automatic debts.

Other Ways You Can Avoid Paying Overdraft Fees

To avoid overdraft fees, simply don't opt in for this kind of program. Instead of opting in to overdraft protection, monitor your account and track your balance through an app or online so you'll know when the balance is low. You can then add money to the account.

Also, many financial institutions allow you to sign up for email or text alerts when your account drops below a specified amount. You can then hold off on making the purchase until you add money to the account or pay another way, like with a credit card. Or some banks and credit unions allow you to overdraw up to a limited amount without incurring a fee or provide a line of credit to cover overdrafts.

In addition, some banks offer free overdraft transfer services, which transfer money in preset increments, such as $100, automatically into a checking account from a linked savings account if the balance is low.

When to Talk to a Lawyer

If your bank won't cooperate and you've lost a significant amount of money due to unlawful overdraft charges, consider contacting a lawyer to resolve the issue.

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