I've still been confused by the changes to overdraft protection on my checking account so here is a post from Trisha Wagner to help clear up any confusion. ~Mrs. Accountability

There have been many changes taking place in the credit card and banking industries in the past few years as a result of the struggling economy.  Many of these changes have been initiated by the government in an attempt to help consumers avoid going even deeper in debt.   One of these changes includes Regulation E which addresses electronic fund transfers.  Effective August 15, 2010, consumers who previously relied on their bank to process transactions that might otherwise be declined due to insufficient funds, will have to “opt in” to this type of overdraft protection.  Without letting your bank know that you authorize them to pay transactions that are over the amount of money in your account, these transactions will now be declined.

Understanding overdraft protection

It is important for bank customers to understand how this new regulation affects them.  When a bank honors a transaction that exceeds the amount of money in your account, they do not do so out of the kindness of their heart.  In fact, the bank will charge you for this courtesy and in some cases overdraft fees can quickly add up to do substantial damage to your personal finances.  While overdraft protection could prevent an embarrassing situation when your purchase is denied, it could end up hurting much more than your pride in the long run.

Benefit of overdraft protection

There are some cases when a person might want to have this overdraft protection in place.  If you do not routinely go over your checking account balance and want to have protection in the event of an emergency where approval of a transaction would be worth the overdraft fee, then you might consider opting in for the added protection.

Drawbacks of overdraft protection

For people who have trouble managing their bank accounts, perhaps due to being disorganized or in some cases simply due to lack of money – overdraft protection is a double edged sword.  It can ensure a much needed transaction is processed; however, it doesn't change the fact that you didn't have the cash to cover it in the first place.  As a result you will not only incur fees (sometimes many) but also owe the bank back the money they paid out to cover the debit.  This can snowball into a negative balance that can quickly put you even farther behind.

Now that Regulation E is in effect, all bank customers have automatically been “opted-out” of overdraft protection.  Managing your bank account well is necessary for all aspects of your personal finance; therefore, it is imperative you understand the terms and conditions which you will be expected to meet.  For most bank customers, opting out is probably the best (and most cost effective) choice; however, if you feel you want the added “protection” which allows you to overdraw your checking account, you will now have to call your bank to give them permission to process transactions that would otherwise be declined.

Trisha Wagner is a freelance writer for DepositAccounts.com, where you can compare rates of checking accounts from dozens of banks in one place.

Did you decide to “opt in” or “opt out”?