Many banks and credit unions routinely allow debit and check transactions to go through even if there isn't enough money in the user's account. Then they slam their customers with overdraft fees, usually without a warning, at the time of purchase, claiming this "service" protects people from bounced checks and declined transactions.
If you have been on the receiving end of this practice, you know that a single $5 transaction can trigger a $30 to $35 overdraft fee, while a series of overdraft purchases in a single day can rack up hundreds of dollars in fees. The people most at risk are consumers who routinely have low balances or who don't monitor their account balances regularly.
If that describes you, MSN Money columnist Liz Pulliam Weston offers six ideas for things you can do to overdraft-proof your account:
Stop writing checks.
They either clear too quickly or too slowly, says Weston. So those who write checks against money that isn't there -- say, a day or two before their checks are deposited -- are likely to bounce more transactions. At the same time, you have little control over when a person or business actually deposits your check, which can in turn delay the time it takes to clear. To avoid running this risk, use online bill-payment systems, which allow you to specify when the money leaves your account.
Don't trust your balance.
The balance that shows at the ATM or on your cell phone may not include recent transactions or may be inflated by the amount of "bounce protection" your bank offers. To get a better idea of where you stand, you need online access to your account so you can check which transactions have processed. If you stop writing checks and use your debit card only with a PIN, as opposed to with a signature, you'll have fewer "pending" transactions to remember as well.
Create a "cushion."
You'd be wise to make sure there's always at least a small cushion of cash in your account. Don't let your balance drop below $100, and keep at least $400 in your savings account for emergencies.
See if you can opt out.
Some credit unions and banks will let you set up your checking account so that overdraft transactions are declined rather than processed. If you opt out, though, you really want to avoid writing checks or using signature-based debit-card transactions, since merchant fees on those returned charges are typically even higher than those from banks.
Set up true overdraft protection.
Under that option, your bank links your checking account to a savings account, credit card or a line of credit. You'll probably pay an annual fee of $10 to $50 and you may also incur a small fee each time the overdraft protection is tapped, but the total is likely to be far less than you'd pay under bounce protection.
Sign up for alerts.
Most major banks will alert you via email or text message when stuff happens in your accounts: when your balance drops below a limit you set, for example, or when certain transactions post to your account. Such alerts, along with keeping a pad of cash in savings accounts, can help you transfer money into your checking account in time to cover pending transactions.
By Marshall Loeb