Before you write that next check, whip out your debit card, or pony up to the ATM, you might want to check your balance. At more and more banks, the money you're taking out may not be yours, and it could cost you big.
Accountant Keisha Pinnock is money smart. But that didn't protect her from making a costly mistake and from feeling ripped off. "I really felt cheated, you know, and when I went to the ATM machine, it didn't say, 'Hey, you're over drafting your account."
More than 1,000 banks now automatically give a new type of overdraft protection to their checking account customers. Yet, experts say most people have no idea. So, you can easily take more money than you have and face a stiff fee. Kiesha says that's exactly what happened to her. "I was charged $28.50 every time that they would go ahead and allow an ATM charge to go through."
Keisha was shocked when her statement came saying she owed hundreds in overdrafts and fees. "I was really upset with the bank."
Critics like Jean Ann Fox at the Consumer Federation of America are outraged. They insist this is nothing more than a high interest loan you have to pay back within days. "Consumers can end up paying hundreds of dollars in overdraft fees before they even realize that they've overdrawn their bank account."
Fox says this is a sneaky way for banks to make more than a billion dollars in extra fees every year, "We think this is protection for the banks' bottom line, rather than protection for consumers."
More than fifty groups are joining the Consumer Federation asking the Federal Reserve to look into whether the practice is legal. Overdraft protection isn't new. Banks have offered it to their best customers for years, covering bounced checks at a low rate of interest if and only if customers agree to enroll. Fox says the changing policies are going to far. "The new bounce protection programs let you take money out at the ATM machine or use your card at the checkout line at the grocery and spend money that you do not have ."
But banks say the new practice is good for customers. "It's actually a more fair and more consistent way of covering overdrafts," says Tracey Mills, with the American Bankers Association. She believes it gives customers peace of mind, knowing an occasional mistake will be covered. But, Mills cautions it's not meant to be a long-term way to manage your money. "Think of it as a spare tire. You use it in an emergency. You don't want to drive across country with a spare tire."
Mills also points out the service helps you avoid bounced check fees to retailers.
But, what if you don't want this new overdraft protection? Jean Ann Fox says there are steps you can take to protect yourself. "Ask the bank to leave you out or change banks so you can get an account that has real overdraft protection that you sign up for, that only costs you, say, 18 percent a year if you overdraw your account."
Keisha's advice? Keep a balanced check book and know how much is in your account. You can also use the internet to prevent yourself from overdrawing your account. Most banks now offer some sort of online banking, and usually it's free. You can check your recent transactions and find today's balance so you know just how much is in there before you pull money out.
So how do you repay an overdraft? Jean Fox says collection practices vary with everything from per-day fees to payment plans. But, she says, most often a bank pays itself back out of your next deposit and you get the rest.