Credit Card and Debit Cards No Longer Have Automatic Overdraft and Over Limit Protection

New Credit Card Law Puts a Hold on Over Limit Charges

As you have probably heard by now, the CARD Act takes effect on February 22nd. Many of these changes are part of the law, but a lot of banks are also making voluntary changes to their programs. There are a lot of changes to help credit card users stay out of trouble and avoid ridiculous fees. Most of these changes happen automatically, but there is one thing you may have to take action on if you’d like some of the services to remain in effect.

If you have ever been in a situation where you charged something on your credit or debit card and gone over the preset limit you may remember that the charge probably still went through anyway. That’s because in the past, most cards automatically turned on features that allowed you to go over your limit rather than be declined outright. Then, you got charged a stiff fee for this feature. Card companies billed this as a convenience since they said it would be better to allow you to purchase what you needed rather than flat out decline that purchases. The problem is that you could literally spend $1 over your limit and then get socked with a $35 over limit fee.

Being over the limit is also bad for your credit score. So, by ensuring you keep your balance under the limit you can effectively improve your credit score, even if by just a few points. That could translate into lower interest rates on other loans in the future that could end up saving you thousands.

You Now Have to Opt-In For This Service

To help curb the excessive fees that credit card companies were raking in off of this service the new law now makes this an opt-in service. Going forward, you will need to call your card company and request the ability to allow overdraft or over limit coverage or charges that go over your credit card limit will be declined. This is good news for the millions of people who unexpectedly get hit with these fees for an innocent mistake, but for those who may want to keep this safety net in place, it’s one more step that needs to be taken if you want to continue to use the feature.

Keep an eye on your mail in the coming weeks if you haven’t received a notice like this from your card company already. I know most people see an envelope with the name of a bank or credit card on it and it goes right to the shredder, but it may contain important information about the features on your account and changes that are important to you.

I just received a notice from Chase regarding the debit card overdraft coverage. It states that I need to call them to turn this feature on since it is no longer offered automatically. It also outlines how it works in plain English, which is surprising considering how confusing the fine print on these things usually are. But basically, it states that:

  • It’s free to turn this feature on.
  • If I overdraft my checking account with a debit card purchase and make a deposit to cover it the same business day there’s no fee.
  • If I overdraft my account and don’t make a deposit there will be a $35 fee for each time I use the card over the limit, up to 3 fees per day.

For me, I don’t see a need for this service, so I don’t think I’m going to bother turning it on. I don’t regularly run my checking account balance that low, but more importantly, I already have true overdraft protection set up with a linked savings account. So, if I do accidentally overdraft the checking the money is automatically pulled from savings to cover the transaction and I’m not charged $35 to do so!

But this did get me thinking about my other credit card accounts and I do think I’m going to enable this feature on our credit card reserved for emergencies. While it’s one of those things we never hope to use, if it’s a true emergency and the only option available is to use a credit card for something I think it would be nice to know that the charge is going to go through if I’m a little over the limit instead of not going through at all. I’ll probably never need it, but it’s a small insurance policy just in case. Between our emergency fund in a high-interest savings account, regular checking and savings, and credit cards, we should be adequately covered in any emergency.

Do You Need This Protection?

I’d argue that most people do not need, and shouldn’t have the option for automatic overdraft and over limit protection on their cards. If you’ve never received an over limit fee before and don’t carry a balance on your credit cards, then it might make sense to have this on one of your cards for a rare emergency like I mentioned above. But if you’re someone who’s all too familiar with overdraft and over limit fees, keeps your checking account balance pretty low, or keeps a high balance on credit cards, then you should almost certainly steer clear. You should be focusing on how you can improve your finances so that you can eliminate the need to go over your limit, not continue to make it easy to go over the limit and get hit with stiff penalties.

Instead, create your own safety net. First, establish an emergency savings account. Use this as a source of funds if there is an emergency or if money gets tight. It won’t cost you anything and your money will actually be working for you and earning interest. Next, set up true overdraft protection on your checking account. You can almost always link a checking account with a savings account to use as protection in the event you go over your account balance. In some cases this may be completely free, but some banks may charge you something like $5 to $10 per overdraft. It’s still far better than the up to $39 they can charge you now. Finally, consider getting a 0% or low-interest credit card that you can transfer one of your balances from or simply keep that card tucked away for emergencies only. This way if you do find yourself in a bind you have a source of funds that’s available and you won’t have to worry about whether or not there’s enough room on the card or worry about getting hit with a big fee for going a few dollars over.

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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.

5 comments
Jeremy
Jeremy

Right, the debit card overdraft change isn't part of the CARD Act, but many banks are making these changes anyway. Chase and Bank of America, which are two of the largest banks in the country, plus a bunch of local and regional banks, so tens of millions of people will have these changes applied to their debit cards and may not know it if they aren't opening all of their mail. So, it still pays to make sure you understand what changes your bank is making instead of being caught by surprise.

LiveCheap.com
LiveCheap.com

This is one of the good features of the new law. But to be clear, it only applies to credit accounts not checking accounts that have a debit card feature. Chase may have decided to do it on all their debit accounts voluntarily, but the Credit Card Act does not require them to do anything for debit cards (based on my read of the original law since they are not "credit").

Debit cards as we wrote in Debit Cards: Wolves in Sheep's Clothing are going to increasingly be the source of income for banks using exactly the overdrafting technique. That's why the banks are running all these promos for using debit cards. For debit cards, it can be far worse because of the multiple charges of $35 or more in a day for being a few dollars over.

The banks run an algorithm that pays the largest charges first therefore depleting your balance then paying the small charges last so that they produce the greatest number of overdrafts. So if you use debit for a $3 Starbucks in the morning, then a $7 lunch, and $5 for an afternoon snack and then swing by the grocery store to buy $100 worth of groceries at night but only have $80 in your account to start with. You will get hit with $140 in overdraft fees! Had they processed them sequentially, you would only get 1 $35 fee.

The best thing about the fees for the banks is they come with near zero risk. When you lend on a credit card, you have a potential loss of principal, but when you overdraft on your credit card, there isn't much risk to the bank (especially if you have direct deposit of your paycheck).

Credit Girl
Credit Girl

Likewise Zach, I would much rather get declined than get charged a ridiculous fee of $35... Sometimes you just forget how much is in your checking account, and in that case I'd rather put back one item or so so that I am not charged by the bank.

Zach @College for 10k
Zach @College for 10k

This is very good news for us all!!

I am glad that we will now be able to use our cards without fear of getting charged $35.

I would rather get declined than get charged $35 per overdraft.

Honey
Honey

Yeah, for the second month in a row I went over my limit by less than $5. Sucky. Sadly, though, since it is a credit card then even if I send a payment in now it won't post before the charges go through.

It's a low-limit card that I use to buy groceries and pay off in full every month, it has decent rewards so I get a "free" gift card every 3 months or so, but obviously those rewards start looking a lot less free if I'm paying over-the-limit fees.

I am interested to see what happens this month, since the charges were made on 2/20 but probably won't clear until after 2/22. Obviously the charge can't be declined because it was made before CARD, but since they won't clear until after CARD, will I get over-the-limit fees?

I'm going to definitely opt out of over-the-limit. I'd rather have my charge declined (on that card at least). I have another card with a $15K limit so I find it hard to imagine an emergency where I'd go over.

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