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The third and final phase of the Credit Card Accountability Responsibility and Disclosure (CARD) Act will be going into effect on August 22, 2010 but many banks are trying to beat the legislation to the punch.  Included in this phase of the legislation will be new rules regarding how gift cards are processed and how banks charge on overdraft occurrences. 

As of July 1st, the Federal Reserve is requiring that banks obtain their customer’s permission for charging overdraft protection and allowing purchases beyond the account’s balance.  The big banking leaders in overdraft changes are Bank of America and JP Morgan Chase who are providing their customers with an overdraft ‘opt-out’.  Now their customers will need to decide IF they want the bank to cover any charges above their zero balance and pay the overdraft fee, or if they would rather have the charges denied at the point of sale.  If, however, customers of these banks elect to keep their overdraft protection, the fees will be substantially less than they were previously. 

For example, Bank of America will be reducing the number of chargeable overdraft incidents in a given day and announced in March of this year that they would no longer be charging overdraft fees on charges made with bank debit cards – they will simply be declined.  Debit purchases amount to roughly 60 percent of all overdraft fees and represent a tremendous income loss for BOA.  In an effort to continue the flow of cash from overdraft protection, banks are gearing up full marketing efforts to encourage customers to sign up and continue their overdraft protections.  Before you agree to this arrangement, consider your options carefully.

Acceptance of overdraft protection means:

1. You will be charged a fee (anywhere from $32 to 39) for each overdraft incident up to a specified number each banking day that your account is overdrawn.
2. You will be able to spend without knowing you are overdrawn until the charges have accrued.
3. Some banks including BOA and JP Morgan Chase will not charge on small purchases under $5 (i.e. that coffee won’t cost you $43).
4. Banks will continue to charge overdraft fees on checks and automatic payments, but based on the consumer’s choice, will either decline ATM and debit purchases or cover them for a reduced fee.  BOA will charge $10 each overdraft occurrence with either a credit card or savings account tied to the account.
5. Some banks will also limit the number of charges per day.  JP Morgan Chase will reduce the number of overdraft fees to three per day. 
6. Additionally, banks will process transactions in the order in which they were made.  This is a significant change because banks processed the largest transactions first, which consumed the greatest portion of the account balance and often cause multiple overdrafts on significantly smaller charges. With this change, the transactions will process in the order they are received theoretically causing less overdrafts charges on small transaction amounts. The banking industry expects this change alone to cost them millions in lost revenue.

A majority of overdraft fees (93%) are paid by the delinquent minority of about 14% of the population according to a Federal Reserve 2008 study.  Don’t be one of the reoffending minority.  Have you received your bank’s notification letter yet?  What are your plans for overdraft protection?

About Richard Gaudreau, Esq.

With over 20 years’ experience in practicing law in New Hampshire, Attorney Richard Gaudreau is Board Certified in Consumer Bankruptcy Law by the American Board of Certification and New Hampshire chair of the National Association of Consumer Bankruptcy Attorneys.  He has represented hundreds of bankruptcy clients in both New Hampshire and Massachusetts and handles each case personally.  For more information, contact (603) 893-4300 or visit the web site at www.attorneygaudreau.com.