Thursday, September 30, 2010

The New Overdraft and Debit Laws Explained

According to reports, in the year 2006 overdraft fees accounted for approximately 6% of banking revenue in this country. Fortunately, on August 15th a handful of new laws went into affect to protect consumers in this country from excessive banking fees. However, in addition to targeting overdraft fees and debit cards, the new rules also have a significant impact on gift card practices in this country. To help all of my readers understand the full affect of the new laws, I have put together the following article explaining the most important new overdraft and gift card rules.

I. Overdraft Protection Laws

    What is overdraft protection?

    Before the new law was passed, banks could automatically enroll customers in overdraft protection, which would allow you to charge more than you had in your checking account. Instead of declining the transaction, the bank would approve it, and then charge you with a $20-40 overdraft fee.

    Opt in or out

    Starting August 15th, banks were forced to discontinue overdraft protection services unless customers sign up for it. This means you can decide whether or not you want your card to get approved when you have insufficient funds.

    Disclosure mailers

    As part of the new laws, financial institutions have been required to notify customers of how overdraft protection will affect their bank account. This is because of new disclosure laws that aim to increase consumer transparency in the banking industry, and also explains why you have probably received extra mail from your bank over the past few weeks.

    Checks and bills

    According to the new law, banks can still charge overdraft fees for checks or automatic withdrawals from your account that are higher than your available balance. The overdraft fee rules only apply to ATM debit and check card transactions. You bank may have an option to turn off all overdraft options, but you should ask your financial institution for more information.

    Alternative overdraft protection

    There are other ways to protect yourself from having your debit card declined than enrolling in overdraft protection. If your bank offers online banking then you could make a habit of checking your balance every day to make sure you do not overspend. Some financial institutions also offer cell phone alerts when your balance is low.

II. Gift Card Laws


    Until now, the gift card industry has gone relatively unregulated. However, the new overdraft and debit laws also have implications on gift cards. As of August 15th, companies that issue gift cards cannot charge excessive fees that lower the card’s available balance. The new law limits the number of fees that can be charged to a one-time fee when the card is purchased, and only one additional charge per month. Additionally, inactivity fees cannot be charged at all unless the card has not been used for over a year.


    The new law states that gift cards cannot expire for at least five years. Prior to this new rule, some gift cards would expire in as little as a year.


    Much like the new bank laws, companies who offer gift cards must now disclose fees and expiration dates to customers. For gift cards, the disclosure must be on the card itself, along with a toll-free number or website to find more information if need be.

    Prepaid debit and phone cards

    Unfortunately the new gift card laws do not apply to prepaid debit cards or prepaid phone cards; the rules only apply to gift cards.

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