by Joseph Kenny | 12/30/09

While healthcare reform takes center stage, a quieter, but still important reform is taking place: credit reform. The cogs have been turning, and as soon as next summer, there will be much more stringent regulations on how lenders, banks, and credit card companies can interact with customers, especially in regards to sneaky practices and unfair tactics.

One such practice is the overdraft fee, which is an overly-punishing penalty for withdrawing or spending more money than you have in your checking or banking account, such as through an ATM or debit card.

Currently, when withdrawing funds, if you take out more money than you have in the account, your bank can charge you an overdraft fee of between approximately $20 and $40. In 2009, banks are projected to receive over $38.5 billion in overdraft fees, which shows just how lucrative this particular scheme is for banks. This is considered to be something that consumers need protection from.

Federal Reserve Chairman Ben Bernanke said, “The final overdraft rules represent an important step forward in consumer protection.”

Although the regulatory changes still leave something to be desired, they will be helpful for consumers who rely on ATMs and debit cards. The way it will work come next summer is that the consumers must give informed consent to opt in before any overdraft fees can be assessed on either ATM or debit card transactions. Fed officials are aware that there are times when consumers actually prefer overdraft services, particularly when they write checks for important bills like utilities, rent, and mortgage payments. In these instances, it is very important that the money gets where it’s intended on time.

As for negative practices that banks can and still do conduct, one example is the ability to charge multiple overdraft fees repeatedly within a single day. On the plus side, people who withdraw from an ATM will now see a mandatory warning that will tell them if they are about to withdraw more than they have and incur an overdraft charge. Many of the charges that banks received came from individuals who were mistaken about how much money was available, so this extra layer of protection will be a welcome one for many.

Financial institutions have to comply with these new regulations by July 1, 2010, but existing customers at most banks can still be charged overdraft fees until as late as August 15. This extra time is supposed to give those customers the ability to explore alternative options for covering a shortfall in their bank account. From that point on, both existing and new customers will be given the option to opt in for overdraft protection.

Customers will be able to see a clearly laid-out notice with information on fees and options available to them, and the institutions will be required to have a written confirmation of customers’ opt-ins on record.

If you choose not to opt in or don’t respond, the banks cannot charge you an overdraft fee. That includes times when you accidentally overdraw from the ATM or overspend on a debit card transaction. You will be ensured the same account terms, conditions, and features as your counterparts who do elect to have overdraft protection, which gives you more choices and gives the banks less license to charge customers for frivolous reasons. At last, you have the freedom to decide for yourself.