College students will greatly benefit from new debit card regulations that will stop automatic overdraft charges for ATM withdrawals and debit card purchases. The changes, which will kick in next summer, are a giant step toward transparency in banking practices.
Thanks to a decision by the Federal Reserve last week, banks will have to send notice of the overdraft options available to consumers.
Consumers must then opt in to be able to make purchases after they run out of funds in a checking account. Under the new rules, consumers will still be charged for bouncing a check or paying a large bill when an account has insufficient funds. The Fed says this is because consumers want to be able to overdraw to make a mortgage or car payment.
Those who do not respond to their bank to say they want to be able to overdraw and be charged for it will likely have their debit cards rejected when trying to make a purchase or get cash. That might stop someone from buying a candy bar, but it will also prevent paying 30 times the value of the candy bar. The average overdraft fee this year rose to an average $29.58, according to the consumer-friendly Bankrate.com.
The new rules are great news for the growing number of Americans, including many young people, who regularly keep a low balance in their checking account. The Federal Deposit Insurance Corporation estimated more than 50 million overdraw their accounts at least once per year; 27 million do it five or more times per year.
Banks and credit unions profit enormously from the overdraft fees. In 2008, the fees amounted to $28 million, a 35 percent increase from 2006, according to the nonpartisan Center for Responsible Lending.
So many consumers end up stacked with these fees because banks take the largest charges out of an account first — another service many customers want to allow important bills to be paid. It also allows the bank to collect extra fees by charging for each subsequent overdraft.
The worst part is that consumers are often unaware of or misunderstand the nature of the charges. The coming changes mandate greater transparency by requiring permission for overdraft fees, along with written notification from a bank that a customer has chosen to opt in. Those who do not opt in must be given the same account terms as those who do.
These long overdue changes are a good first step toward protecting the customers most vulnerable to abuse by financial institutions. Congress is considering mandating similar rules, and the Fed is next tackling prepaid debit cards and the exorbitant fees and predatory conditions attached to them. It seems the Obama administration is making greater financial transparency a priority, which is good news for cash-strapped students.
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