Chase has announced a change to their overdraft protection service. At first glance, the change may look like it will reduce fees for most Chase checking account customers. The change may reduce overdraft fees, but many customers may be hit with more fees from their Chase savings accounts.
Here’s an overview of the overdraft policy changes that Chase provided:
The first potential gotcha will be Chase checking account customers who don’t have a Chase savings account and are using their Chase credit card as the backup funding account. If they don’t open a savings account, overdrafts may result in declined transactions and nonsufficient funds (NSF) fees.
A less obvious gotcha may hit customers who do have Chase savings accounts.
A federal regulation limits certain types of withdrawals from savings accounts to six per month, and that includes automatic overdraft transfers. For this reason, banks generally charge a fee for each transfer that occurs after the sixth transfer. In the case of Chase, this fee is called the Savings Withdrawal Limit Fee, and it’s currently $5 per withdrawal.
One important feature of this overdraft policy change that increases the likelihood of customers being hit with the Savings Withdrawal Limit Fee is the amount that will be transferred from the savings to checking account. Currently, automatic transfers are generally in $50 increments. After the overdraft policy change, the exact amount needed to cover the transaction will be transferred. Thus, small checking account withdrawals, like everyday debit card transactions, will likely trigger more overdraft transfers.
Here’s an example of how this overdraft policy change may trigger more overdraft transfers, and thus, more Savings Withdrawal Limit Fees. Under the current policy, if a debit card purchase of $10 triggers an overdraft, a $50 transfer from the savings to checking account will provide a balance of up to $40 in the checking account. This provides a small cushion for additional purchases. If additional small debit card purchases are made, no overdraft transfer will be necessary. Under the new overdraft policy, each debit card purchase may trigger an overdraft transfer which may quickly add up to over six.
A better policy for customers would be if the bank declines everyday debit card transactions that would cause an overdraft transfer even if the customer has overdraft protection.
Chase actually has two types of overdraft policies. One is called Overdraft Protection and the other is called Chase Debit Card Coverage which covers everyday debit card transactions. As required by federal regulation, banks cannot charge fees for everyday debit card overdrafts unless you have opted in to consent to fees on these types of transactions.
A Chase customer may have chosen not to opt in to debit card coverage so that everyday debit card transactions will be declined if there isn’t enough money in the checking account to cover the transaction. However, if the customer chose overdraft protection to avoid returned checks, the overdraft protection will also be applied to everyday debit card transactions even if the customer didn’t opt in to debit card coverage.
With the new Chase overdraft policy, everyday debit card transactions may cause many overdraft transfers from the savings account. This is due to the fact that under the new policy, the exact amount needed to cover the transaction will be transferred. The higher number of overdraft transfers will make it more likely that the customer will exceed the limit of withdrawals allowed from the savings account which will cause a fee for each withdrawal.
The Bottom Line
The overdraft policy change at Chase should help some customers. The removal of the overdraft transfer fee is a nice change. However, Chase checking account customers shouldn’t depend on overdraft transfers especially if they are active debit card users. Under the new overdraft policy, active debit card users may still end up paying fees.
Free overdraft transfers can sometimes not only save consumers fees, but also allow consumers to earn more interest. This requires that the savings account have an interest rate that’s high enough that it’s worthwhile to maintain a large savings account balance and a small checking account balance. That’s not the case for Chase where the standard savings account has a very low interest rate (currently 0.01%).