Overdraft fees can be tricky. Here's how to protect yourself from costly penalties.
When your checking聽account reaches zero, you may be safe or sorry depending on whether you have to pay overdraft fees. While these fees are common, a government watchdog says one bank may have gone too far in pushing them聽to its customers.
The Consumer Financial Protection Bureau is suing Minnesota-based TCF Bank, accusing it of misleading customers into signing up for costly overdraft services.
TCF Bank 鈥渄esigned its application process to obscure the fees and make [overdraft protection] seem mandatory for new customers to open an account,鈥� the consumer watchdog said in a聽聽on Thursday. The agency also claims that TCF Bank opted existing customers into their overdraft service with a 鈥渓oose definition of consent.鈥�
TCF rejected the claims in a聽, saying, 鈥淲e believe that at all times our overdraft protection program complied with the letter and spirit of all applicable laws and regulations, and that we treated our customers fairly.鈥�
TCF Bank operates 341 retail branches in Minnesota, Wisconsin, Illinois, Michigan, Colorado, Arizona and South Dakota.
You can protect yourself from overdraft fees at your bank, but the language can get a little tricky. 聽Here鈥檚 what you need to know to avoid them.
How overdraft services work
Overdraft protection kicks in when your bank account doesn鈥檛 have enough money to cover transactions. It includes two聽services that sound similar but differ greatly in cost.
With 鈥渙verdraft coverage,鈥� in exchange for a fee, a bank or credit union pays a transaction with its money when your checking account doesn鈥檛 have enough cash聽to cover it. This also may be known as 鈥渙verdraft courtesy.鈥�
When the bank fronts you the money, overdraft fees can be charged multiple times in a single day. The median overdraft fee is $34, according to the CFPB.
Transactions eligible for overdraft protection coverage are ATM withdrawals, debit card purchases, checks and online bill payments.
With 鈥渙verdraft transfers,鈥� an institution pulls your money from a linked account and puts it in your checking account to cover transactions. Some banks do this for free; others charge $10 or $12, but it varies by institution.
What 鈥榦pting in鈥� really means
A bank or credit union can鈥檛 charge overdraft fees on ATM and most debit card transactions unless you affirmatively 鈥渙pt in鈥� to the service, according to the Electronic Fund Transfer Act and Consumer Financial Protection Act of 2010. According to the CFPB, accounts that are opted in are three times as likely to have more than 10 overdrafts per year than accounts that are not opted in.
If you don鈥檛 opt in, the institution doesn鈥檛 cover purchases that would overdraft your bank account, and your transaction is declined. If you鈥檙e in an overdraft program, you can 鈥渙pt out,鈥� or cancel it.
Adding another wrinkle, you may still be charged for bounced checks and other transactions such as online bill payments. These costs聽鈥� known as nonsufficient funds fees 鈥� can be charged regardless of whether you have overdraft protection.
How to minimize overdraft fees
Even the most careful customer鈥檚 account may run low occasionally. Minimize the fees by taking the following steps:
- Set up electronic alerts:聽Get phone or email notifications when your balance is running low.
- Add a cash cushion:聽Keep extra padding in your checking account to avoid overdrafting.
- Don鈥檛 opt in:聽Purchases will be declined when you don鈥檛 have enough money, but you won鈥檛 incur overdraft fees, either. If you already have overdraft coverage, you can still opt out.
- Create a safety net:聽Link your savings account or a line of credit to your checking account for cheaper or free overdraft transfers.
- Shop around:聽Do you overdraft frequently?聽聽or credit union that offers free overdraft services.
If you鈥檙e still confused, ask as many questions as possible until you understand your bank鈥檚 terms. By taking the necessary precautions, you can prevent your $6 fast-food debit swipe聽from turning into $34 or more in fees.
Melissa Lambarena is a staff writer at NerdWallet, a personal finance website. Email:聽mlambarena@nerdwallet.com. Twitter:
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