In late September, Bank of America announced in a press release that it has modified its policy for charging what it calls overdraft fees, but what some critics classify as abusive overdraft loans.

In some cases, "overdraft fees" and other credit card fees and practices cause some people to file bankruptcy.

What are Abusive Overdraft Loans?

In the era of debit card usage, it’s far too easy to spend more money than we have. And most banks allow customers to make transactions even if they don’t have sufficient funds in their accounts – but each such transaction results in a fee.

The so-called fee is, essentially, a super-short term loan: the bank covers your purchase and you repay the amount plus $25 – $35. This may not sound like much, but if you make several over-limit purchases in a day, it can add up.

Bank of America’s New Policy

Earlier this year, BoA introduced fee increases, but apparently changed their plans in light of the negative publicity credit cards have received recently (Credit Cardholders’ Bill of Rights, anyone?).

Here’s a summary of what the new BoA policies will look like beginning October 19th:

• For overdrafts totaling less than $10 in a single day, Bank of America will not charge any overdraft fee, as long as the account is settled within five days. (A $35 fee will be levied if the account remains unbalanced after that period.)
• The bank will set a limit of four overdraft charges in a single day. (This is a change from the policies introduced earlier, which raised the cap to ten.)
• BoA will also modify the opt-out process so consumers can choose not to have “overdraft protection” on their accounts. For the time being, you may have to go to a physical bank location to do this, though the bank is reportedly setting up a phone service.
• BoA will outline fees and charges in what it calls “Clarity Commitment” – apparently this will provide a plain-language explanation of their overdraft system.

Protecting Yourself from Abusive Overdraft Loans

If you aren’t sure whether or not your bank offers overdraft protection, be sure to find out. In most cases, opting out of such programs is a good idea. By eliminating the service, you will likely be denied when you try to make a purchase or withdrawal from your account when you have insufficient funds.

For most consumers, the temporary embarrassment is a better bargain than the permanent fees.

Additional Resources

Summary: Credit CARD Act of 2009 (PDF)

Study: Overdraft Protection Programs: The Emerging Battleground for Bankers and Consumer Advocates (PDF)