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 15^th 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

Fees

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 15^th, 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.

Expiration

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.

Disclosure

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.

Questions for the Tax Lady: September 20th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: can you download IRS forms online?

Answer: Absolutely! The IRS offers a vast majority of their forms online at www.IRS.gov The forms and publications library is convenient, simple and saves you a trip to your tax preparer’s office. I download IRS forms all the time. A few things to remember when downloading tax forms:

1. Make sure the form is for the correct year. Tax rules change every single year, thus each tax form is updated each year. Using last year’s form can cause some big problems! How do you know what year the form is for? All forms should have the tax year in huge print in the top left corner.
2. Make sure it prints properly! Once you’ve printed your form, take the time to compare it with the form on your computer screen. If your printer settings are a little off, the form can print incorrectly and that can cause you some pretty big tax headaches.
3. Save yourself a world of trouble, and open up the instructions for any form you are going to use. Full instructions for each form are available for download as well. You may not need to print them (they are usually pretty long), but have them open on your screen, ready for when you have a question.

Question: can you deduct overdraft fees on your tax return?

Unfortunately, the answer is, no. The IRS opinion is that banking overdraft fees are really penalties, and therefore not deductible on your tax returns.

U.S. banks may end free checking accounts: report

Banks seem to be tightening up their financial purse strings lately. The latest report from Reuters.com states banks are doing away with free checking accounts. It further explains that this move is expected primarily to hurt retail businesses who could be asked to pay new monthly maintenance fees on their basic accounts that do not generate a lot of activity. According to Reuters banks are incurring expenses of $250-$300 a year to maintain each of the approximately 200 million checking accounts. However, some people disagree with this assessment. Don’t banks borrow against the money in checking accounts? And aren’t they already charging customer’s overdraft fees, ATM fees, and dozens of other outrageous fees? What do you think? Are you with a large bank or do you prefer a credit union instead? Let me know your thoughts on my Facebook or Twitter.

15 most hated fees

Fees. No matter what they’re for, they are not very popular. Unfortunately, fees aren’t going anywhere. We will probably encounter more than the expected in the coming years. CNN Money discusses 15 fees we should be on the look-out for:

1. Forking over new charges for overdrafts: Often banks allow you to link a savings account to your checking account so that funds can be pulled from the former if you overdraw the latter. This workaround can help you avoid nonsufficient-funds fees, now averaging $30, according to Bankrate.com. But many banks have found a workaround for your workaround: They'll charge you $10 to $20 every time they transfer your money between the accounts. Meanwhile, it costs the bank next to nothing to move the funds, says Bryan Derman of Glenbrook Partners, a financial services consulting firm. "They're charging you for what's essentially an automatic transfer!" echoes reader Zoe Dowling, whose bank (Wells Fargo) levies the fee.

How to fight back: Sign up on your bank's website or Mint.com for e-mail or text-message alerts that tell you when your checking account balance is below a certain amount. That way, you can make transfers for free, yourself--before an overdraft is triggered.

2. Paying to use your frequent-flier miles: Can it really be called "reward travel" if you have to pay for the reward? To redeem your miles for any flight on US Airways, you must pay a $25 to $50 fee. ("It's an effort to recoup a portion of the overhead of the program," says spokesman Todd Lehmacher.) American, United, and Continental, among others, usually make you pony up $50 to $500 one way to use miles for upgrades.

How to fight back: Stick to one airline, and try to achieve gold or platinum status (which generally involves flying at least 25,000 miles a year). That way you'll escape redemption fees, says Randy Peterson of WebFlyer.com. Don't travel that much? Consider a credit card that lets you earn miles -- specifically "elite qualifying miles" -- such as Platinum Delta SkyMiles American Express (800-223-2670). Just be sure to weigh the annual fee against the benefit you'll get.

3. Paying to shut a brokerage account or IRA: No matter how unhappy you may be with your broker, you may be even more unhappy to discover that you'll have to shell out money to sever your relationship. Many of the major firms -- such as Fidelity, Schwab, and WellsTrade -- charge transfer fees, generally between $50 and $200, if you close your account and move your money to a different firm. Reader Eric Nix finds it "outrageous" that he had to lay out $50 to switch brokerages. Benjamin Poor of Cerulli Associates, a financial services market research firm, agrees. "It's like having a bad meal at a restaurant, then being charged to leave the building."

How to fight back: If your current brokerage is holding you hostage with its fee, appeal to the company where you want to move your funds. Many will reimburse you. To prevent these problems down the road, when you first sign up at a brokerage, ask that it waive such fees. "These things are negotiable, especially if you have a sizable account," says Mason Dinehart, a securities expert witness. (Sizable means six figures.)

4. Plunking down to hang up on your cell carrier: Agreeing to a cell phone contract is sort of like signing over your soul to the devil: You know there will be hell to pay if you break your end of the deal. In this case you'll owe $200 to $350. Such fees usually subsidize the cost of the handset you bought at a low price, says Bob Sullivan, author of Stop Getting Ripped Off.

How to fight back: Try to talk your way out of the fee, mentioning examples of poor service you've received (keep records and cite them). Customer rep won't budge? If you can stand it, stick with the carrier a while longer. Termination fees are generally pro-rated, so the longer you hold out, the less you'll pay. Next time consider a prepaid phone, which doesn't require a contract. It's generally a good deal if you use it less than 400 minutes a month during peak hours, says Sullivan.

See all 15 fees and how to fight back here.

5 Ways to Curb Bank Overdraft Fees

While some bank account holders may be happy to see the end of overdraft fees, other consumers are upset they may have their card declined for important bills if there are insufficient funds. However, SmartMoney.com says this is not a good enough reason to opt for overdraft protection, and is offering five ways to curb overdraft fees.

Carry backup cards

Cardholders who don’t opt in for overdraft coverage but carry borderline balances still may get turned away at the register. Consumers should keep at least two or three backup cards in their wallet and a little cash just in case, says Odysseas Papadimitriou, the CEO of Evolution Finance, which publishes CardHub.com, a credit card comparison web site. “Keeping an extra one or two credit cards on hand can help prevent running out of payment options if some sort of fraud-related hold strikes your account,” he says.

Balance your checkbook

To avoid needing a backup, account holders should keep an eye on their account balances, says Papadimitriou. They should check weekly, or even daily if they’re operating on the edge, he says. Then, cardholders should be vigilant about withdrawing funds from retail stores that offer cash back on debit-card transactions. Although banks will generally alert customers if they’re about to go over their limit at ATMs, in-store debit withdrawals typically won’t trigger any overage notification, Papadimitriou says. It’s still not clear whether this problem will be fixed when the overdraft coverage opt-in provision takes effect, he says.

Sign up for payment alerts

Cardholders given to procrastination should consider signing up for payment alerts, says Papadimitriou. Most card issuers, including JPMorgan Chase (JPM: 39.04*, +0.10, +0.25%), American Express (AXP: 39.15*, +0.14, +0.35%) and Bank of America, have long offered to alert their customers when account overages occur or when payment due dates are imminent. “We’re trying to help customers to reduce overdraft fees,” says a BofA spokesman. “We don’t want them to buy a $40 cup of coffee.”

Continue reading at SmartMoney.com…

Watch for Sneaky New Bank Charges

When the new credit and overdraft laws take into effect, many banks are expecting to lose revenue. Therefore, it should come as to surprise that many are already looking for ways to make up for the loss. In place of sneaky overdraft fees, several banks are looking to create new fees on checking accounts, and additional banking options for additional revenue.

MSN Money posted an interesting article alerting consumers of these changes. Reportedly, banks will begin bombarding customers with these new fees throughout 2010 in preparation for the new law that will take affect in July.

For some customers, that could mean the end of free checking accounts.

“Banks, just like airlines and local governments, need to fill the revenue gap,” Greg McBride, the senior analyst for Bankrate.com, told Smart Money last year. “They’re looking to fee increases to do that.”

A 2008 study by the Federal Deposit Insurance Corporation reported that 75% of checking account holders paid nothing for the service. The other 25% paid minimum balance fees, overdraft fees and other service charges -- subsidizing free checking for everyone else, Consumer Affairs reported.

With banks’ ability to levy some of those charges restricted, expect banks to raise the threshold for free checking, increasing the number of customers who pay something, Consumer Affairs predicts.

Continue reading at MSN Money.com…

Fed to Curb Banks Overdraft Fees

The Federal Reserve made a surprising announcement today regarding bank overdraft fees, which have become a major source of profits for banking institutions. By October 2010, they will be required to have customers sign up for an overdraft program in order to charge them fees. According to ABCNews.com some banks have already begun changing their accounts, and the rest have less then a year to follow suit.

The Federal Reserve today announced new rules that will ban banks from charging overdraft fees on debit card and ATM transactions unless a consumer opts in to an overdraft program.

"The final overdraft rules represent an important step forward in consumer protection," Fed Chairman Ben Bernanke said in a statement. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."

Overdraft fees can result in consumers being charged up to $35 for withdrawing more money than they have in their accounts. Under the Fed's rules, all consumers -- including existing account-holders -- would have the choice to sign up for overdraft services.