Starting on August 15th, 2010, the Federal Reserve banned banks from automatically enrolling customers in overdraft protection for cash withdrawals or debit card purchases. You’ve probably received a letter from your bank previously, looking for you to “opt-in” to the overdraft plan or to sign that you are aware of the new overdraft regulations. If you don’t opt-in and agree to overdraft protection, swiping your debit card for a purchase when you don’t have enough money to cover it will result in your card being declined instead of your bank covering it and then charging you between $20 and $35 for an overdraft fee.
If you’ve chosen to opt-in and continue the overdraft protection rather than face the possible embarrassment of being declined in the check-out line, there are a few things you can do to prevent the overdraft fees from occurring in your checking account.
Use Your Check Register Religiously
The most obvious method to avoid overdraft fees is to spend less than you have available. We know this but with electronic banking, it can become difficult to keep track of direct deposits, debit card transactions, automatic payments and checks that haven’t cleared. With all of the electronic transactions and automatic income and payments coming and going from your account, it can be easy to just sit back and let it happen.
Trying to keep a running balance of your account mentally is probably not a good idea. Depending on the “available balance” on your online account screen is also not a true representation of how much money you have available since you could have checks which haven’t cleared, or debit card transactions that haven’t hit your account. Even though you may not physically make all of your deposits or withdrawals each time, you should still keep an accurate check register which indicates all incoming money and all outgoing money, so you can see how much money you actually have.
Link Your Savings Account to Your Checking Account
Some banks will allow you to connect your savings account to your checking account to avoid paying overdraft fees. If you make a purchase that drains your checking account, your bank will automatically pull money from your savings account to fund the purchase. While you won’t get hit with a $30 or $35 overdraft fee, most banks will charge for this service. From what I’ve seen, the cost is usually around $10 each time you have to tap into your savings account. The fee is considerably less than paying the higher overdraft fees to the bank. Your linked savings account has now become your line of credit.
The drawback is that it becomes more tempting to spend money from your savings account when your checking account is low. If you do decide to link a savings account with your checking account to avoid overdrafts, it’s recommended you keep another savings account for savings at a different bank or at least one that is not connected to your checking account in any way and use that account for long-term savings.