Are You "In" or "Out"? Why You Should Think Twice Before Opting In to Overdraft Protection

June 26, 2013

By Lila Quintiliani, AFC®
Military Saves Assistant Coordinator, Communication & Outreach

The Consumer Finance Protection Bureau (CFPB) recently released a report on bank and credit union overdraft practices.  Federal regulations that went into effect in 2010 require financial institutions to obtain consent from customers before the institution can enroll them in overdraft protection.  If customers choose to “opt in” to overdraft protection and they subsequently overdraw their account, they can be charged a transaction fee. What is alarming about the report is that the Bureau found that consumers who opted in were charged more in fees than those who did not and were more likely to have their accounts involuntarily closed.  Also of concern is that fee structures and practices are highly complex and differ between each banking institution, making it difficult for consumers to understand (or avoid) fees and penalties.

“In” or “Out”?

The CFPB white paper says that there was a lot of variance among “opt in” rates among financial institutions, with some reporting 40% of new customers as choosing overdraft protection and other banks reporting less than 10%.  But a Consumer Reports article cites an independent study that claimed opt-in rates of 77%.  The article also says that in 2011, banks took in some $31.6 billion in overdraft fees. 

The CFPB report found that in 2011 average checking account fees for those who opted in were $196 while the average fees for those who did not opt in were only $28.  Ironically, consumers generally choose to “opt in” because they believe it will protect them from fees (and even if a consumer chooses to “opt out,” he or she can still be charged if an overdraft occurs from a check that has been written, a recurring debit or an online payment).

It’s Complicated

Each institution makes its own rules for overdrafts, which can seriously affect the amount of fees imposed.  Some banks have daily limits for the number of overdrafts that can be incurred each day while others do not.  Some institutions post larger transactions first, which can make smaller transactions (that may have actually occurred at a point earlier in the day) also go over the limit.   Deposits may also be credited at different times.  And some banks have a fixed dollar amount for limits while others base it on a consumer’s balance or banking history.

What You Can Do

Here are some ideas to help combat overdraft fees:
·    Be familiar with your banking institution’s overdraft policies and how they post transactions.
·    Decline overdraft protection.  While you can still be charged fees under the circumstances listed above, under other circumstances, if you opt out, your debit card will simply be declined and you won’t be charged fees.
·    Tie your savings account to your checking account for overdraft coverage instead of opting in to overdraft protection.  While some banks may charge a transfer fee, it will likely be lower than the overdraft fee.
·    Monitor your accounts closely and track your expenditures so you will know when you are close to overdrawing your account.  Many banks now allow you to sign up for text or email alerts when transactions are posting or certain balance levels are reached.

Want more information on saving and tips on reducing debt?  Take the Military Saves Pledge today and then visit

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