As detailed in this WalletPop article, there is a forthcoming change in how banks handle debit card transactions. If you are in the US and you have a bank account, you have probably gotten something in the mail or with your online statement about opting in to continue something like “courtesy pay” or “bounce protection.” I’m going to explain why it is a bad idea to opt-in and why the opt-in requirement came about.
Until 2010 July 01, financial institutions (banks and credit unions) are allowed to accept debit card transactions which would take the balance negative, at their discretion (usually up to a negative balance of $200 or $300, sometimes more than that). The institution charges a fee per occurence, typically in the $25 to $40 range (sometimes capped at two, three, or four fees per day). Until recently this was a huge revenue stream especially for for-profit banks, but it came at the expense of those who could least afford the fees. (The APR for an overdraft equal to the overdraft fee ($25 for a $25 overdraft, etc) for one day is 36,500% and is even higher for overdrafts where the fee exceeds the transaction amount. This makes payday loans look like a bargain.)
The banks (and even some credit unions) are using heavy-handed, aggressive scare tactics to try and convince people to opt-in to continue this “protection.” They cite such things as being stranded with no money and the fee being a relative bargain by comparison. The reality is, the computers behind debit card transaction approvals are stupid and will just as easily charge the fee for going one penny over at a coffee shop as they will for an emergency tow or car repair. Of course they will! The banks have no reason to tell the difference and a typical overdraft fee is almost pure profit!
My advice is simple: don’t opt-in. If you need an emergency credit card with, say, a $500 limit, get one, and then use it only for emergencies. If you decide to ignore my advice and opt-in to a “courtesy pay” arrangement anyway, keep close tabs on your account balance, and only overdraw a deposit account as a last resort.
A similar rule has already gone into effect for credit cards and discretionary overlimit approvals. I advise not opting in to these either, for similar reasons.