How to Save on Overdraft Fees

Josh looked at his bank account balance on his computer screen and groaned. He forgot that his 6-month car insurance premium would be automatically debited this month. That meant that he had had $585 less in his account than he realized, and he had made several debit purchases in the past two days--all of which would have been covered, of course, had the debit not hit. But now he was overdrawn by nearly a thousand dollars, after both his debits and the corresponding $25 overdraft fee for each purchase had hit his account.

Josh's predicament is all too familiar for millions of Americans who have inadvertently spent more than they had in their checking accounts, either knowingly or otherwise. An economic research firm reported that banks raked in a whopping $37 billion in overdraft fees from customers in 2008 alone. Another report from the FDIC revealed that three out of four banks now automatically enroll their customers in overdraft protection plans, plans that allow the bank to automatically remunerate merchants for purchases made by customers who have no money to cover them--and then charge the customer an overdraft fee, which can run as high as $38.

Of course, this creates a vicious cycle for customers who try to get their accounts right-side up again; many times the overdraft fees will exceed the amount of funds that a customer can deposit to cover their shortfall. For example, a customer has a checking account balance of $150, but a periodic debit of $200 hits the account. If the customer makes four additional purchases totaling $45 the same day that the debit hits, then he or she will have to repay $95 of purchases plus four overdraft fees. If the overdraft fee is $35, then the customer has to come up with $130 to bring the account out of the red. Perhaps most annoyingly, most banks will charge the largest debit first in order to collect the maximum amount of fees possible. If you have $45 in your account and make purchases of $50, $35, $20 and $10, the bank will apply the $50 purchase first, thus rendering your account overdrawn with the first purchase. Then they will charge you a fee for all four purchases.

Fortunately, there are several things that you can do to avoid these charges. Learn how you can put the lid on bank fees and keep your hard-earned cash for yourself.

Instructions

1. One of the most effective measures that you can take to reduce or eliminate overdraft fees is to bank at a smaller community bank or credit union. These institutions tend to charge lower fees to begin with, and are also more amenable to negotiation for fee removal in some instances. Larger banking conglomerates are often indifferent to requests to remove fees. Smaller banks are also less likely to automatically enroll you in an overdraft protection program.

2. Linking your checking account to another account is another simple way to avert overdraft charges. Most banks and credit unions will allow customers with more than one account to link their checking account to their other account. Any purchases made in the checking account for which there is no money are automatically applied to the other account, usually a savings or money market account. Checking accounts can also often be linked to a credit card, if the card was issued by the same bank that administrates the checking account. Even home equity lines of credit can be used for this purpose in some cases. Some larger banks levy a modest charge for this type of transfer, such as $5 or $10. However, many banks offer this service for free. Look for a bank in this category.

3. Be wary of the "available balance" amount that shows up on your statement or computer screen. Many banks show this balance without taking any prior debits made that day into account, and it also will not reflect any outstanding checks that have not posted. Keep your checkbook balanced and remember that not all electronic transactions post instantly. If you need to know your real balance, call your bank and ask them if there are any transactions pending that aren't shown online or on your statement. But in some cases, even they can't see checks or debits until after they actually hit, so this is not a foolproof source of information either.

4. Impose a mandatory minimum balance on your account and stick to it. This is perhaps the most effective form of overdraft protection for those who have the discipline. Of course, many banks require all of their customers to do this, and in some cases the minimum balance is as high as $1,000--and failure to maintain this balance can result in a service charge in and of itself. But padding your account provides a first line of defense against any kind of overdraft charge.

5. You can simply opt to decline overdraft protection in many cases. You will usually have to complete a form or two, but this allows you to escape all future overdraft charges. Of course, your debit purchases will be immediately declined if you run out of money, but this is cheaper than paying overdraft fees, albeit much less convenient in some cases.

6. Find a bank that simply charges a flat fee every month or quarter in lieu of overdraft fees. Some banks will charge a monthly fee of perhaps $20, but levy no penalty for those who exceed their checking account balances. This type of account may be effective for those who keep low balances in their accounts and live from paycheck to paycheck.

7. Try the envelope system if all else fails. Make up a budget and categorize your expenditures, then allocate an envelope for each category. Withdraw your earnings in cash from your account in a single withdrawal and then allocate the appropriate amount of cash to each envelope. Then, when you're out of cash for the month, then you can't spend any more. This method may take some adjustment, but it will guarantee that you won't pay overdraft fees if you stick to it.