Consumers in the United States are encouraged to educate themselves in their bank or credit union’s overdraft rules to avoid unfair overdraft charges.

By understanding their bank or credit union’s overdraft rules, customers will be better prepared to dispute any unusual overdraft fees that either should not have occurred or incurred much sooner than anticipated.

One of the main overdraft rules customers should understand is that their respective financial institutions, bank or credit union, cannot implement overdraft action unless the customers sign up for overdraft protection.

Overdraft protection is a service commonly offered by banks and credit unions, in which the financial institution pays a transaction that may overdraw the customer’s checking account. In these cases, the bank pays the transaction, while the customer’s account goes into a negative balance. When this service is done, the customer incurs an overdraft fee from the bank.

Overview of Overdraft Protection

Overdraft protection started out as a discrete service to help save consumers from the public embarrassment of card decline, but has allegedly become an abusive tool for banks and credit unions to impose unfair insufficient fund fees.

For this reason, the federal government mandated that banks and credit unions get the consent of their customers before implementing overdraft protection. This policy was enacted in 2010, which gave customers the choice of opting into their financial institution’s overdraft protection.

If the customer chooses to opt in, the bank and credit union can now authorize transactions that may cause their account to be overdrawn. However, bank or financial institutions may also charge other insufficient fund fees like ATM withdrawals that overdraw their account.

Considering that overdraft fees can be as high as $35 per overdraft, the fees can quickly snowball for financially vulnerable customers. It is important for customers to know the overdraft rules of their bank or credit union, if they currently are or have considered signing up for this protection.

There are two primary ways to avoid overdraft fees if consumers follow these simple steps:

• Monitor their Primary Checking Account Balance: Customers should keep track of the money being deposited into their account, as well as the money being withdrawn. Most banks and credit unions offer online services, in which customers can easily do this by checking their mobile phones. Customers are also advised to keep a cushion fund, to help prevent unintended overdraft fees.
• Link their checking and saving accounts: If the savings and checking accounts are linked, the financial institution will transfer funds from the saving account to cover the difference in case the checking account is in danger of being overdrawn. This eliminates the need for overdraft protection, and the transfer fees are often much smaller than overdrafts.

Customers should also ask their bank or credit union if there are alternatives to overdraft protection like a linked line of credit or small dollar loans.

Customers who find themselves facing unfair insufficient fund fees, may be able to file legal action against the bank or credit unions for potentially violating their own overdraft rules.