Banks use scare tactics to get you to sign up for overdraft protection

As we've told you previously, new rules about bank overdraft "protection" programs kick in this coming July. The new rules basically say you have to voluntarily sign up to let your bank keep processing debit card transactions even after your account falls into the red and also charge you around $35 each time.

It seems like a no-brainer, right? Why would you sign up for a service like this? Well, because banks have started alarming their customers with direct mail that makes not signing up sound very, very scary. The New York Times has a story that details some of the scare tactics banks are pulling out.

Maybe you've already gotten one of these letters (or more than one!). If not, and if you don't want to click on the Times link, here's the short version: They'll warn you that your debit card might not work. (Of course, it only won't work if you don't have any money in your account.) They use words like "emergency" to make you think of the worst possible scenario, and they underline words and use red ink a lot.

In other words, this is just a lot of hype. There are plenty of other ways you can protect yourself if your account runs low and you have an emergency, points out Kathleen Day, spokesperson for the Center for Responsible Lending.

Day told WalletPop in an interview that bank customers should ask for cheaper ways to get the "protection" of extra funds available to them. Many banks will let you link your checking account to a savings account or line of credit that will prevent you from overdrawing. (We've written about these programs before. While they're not free, they're a lot cheaper than overdraft "protection.")

Of the bank campaigns, Day says, " It's just misleading. They don't tell you all the ways in which the product they're offering is stacked against you." She points out that overdraft protection is basically a short-term loan from the bank to you, and that $35 "fee" is the interest rate -- which means if you just bought a $6 sandwich that was covered by overdraft protection, you paid a whopping amount in interest for that privilege.

"The bigger picture is, this is why we need a consumer protection agency," Day adds. As consumer advocates have already begun pointing out, financial service companies have already been ferreting out and exploiting loopholes in the new credit card rules -- and those only went into effect yesterday!

In the meantime, feel free to chuck those scary-sounding letters and tell the banks "no, thanks" when it comes to overdraft protection.

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