Avoiding Overdraft Traps

It used to be that if you didn't have enough money in your checking account, your A-T-M withdrawal or debit card would simply be denied. But these days, banks are letting the charges go through so they can then hit you with overdraft fees. And at quite a profit.

Financial institutions collected more than 17.5 billion dollars in overdraft fees last year, second only to mortgages in profits. Despite new policies, even the most diligent account holders are at risk. Kelli Grant, senior consumer reporter at Smart Money.com, offers some tips on what to watch out for.

First, don't be a complacent consumer. Banks will of course tell consumers that they only need to worry about overdraft fees if they aren't managing their finances well. But consumer advocates say new policies make it easy to encounter problems even if you perfectly balance your checkbook. So take steps to protect yourself.

Always remember, using a debit card won't prevent you from over drawing your account. Banks usually let those debits to go through, instead of rejecting them. Ask the bank to set your account's debit overdraw to zero. Use a credit card for purchases where retailers add temporary holds to your bill, like gas, car rentals or hotels.

Also, reordered debits and deposits. Most big-name banks let your biggest purchases clear your account before smaller ones. Deposits are counted last. If you're not careful, that can trigger a slew of overdraft fees instead of just one. Buffer your account with an extra $100 or so that you don't intend to spend, and don't count on deposits until they show up in your available balance.

Be careful with extended overdraft fees. Fail to promptly pay back a bank's courtesy overdraft, and they'll sock you with even more fees. To protect yourself, set up an attached line of credit or automatic transfers from your savings account. It's much cheaper to handle overdrafts that way because the money comes from your own accounts. You'll pay $5 to $10 annually for the protection.

And finally, be mindful or overdraft maximums. Most banks don't set limits on the number of overdrafts you can have in one day. They also use tiered overdraft system that escalates charges for subsequent overdrafts. That's what makes their reordering transactions trick so inexpensive. If you're hit with a slew of fees, ask the bank to waive them. Point out that they all came from one mistake, and that it's a rare misstep for you.
by Kelli Grant