Avoiding Overdraft Fees

I wrote last week about the possible disappearance of the paper check from our lives in the near future. Perhaps an even more important by-product of this situation is the disappearance of the account attached to it.

As we increase the use of our debit cards to purchase items such as gas for our cars and groceries for our families, we also increase the possibility of losing track of what we’re spending. Combine this with automated bill payments as our society becomes increasingly paperless and if we’re not vigilant about the balance in our accounts we run the risk of spending more than we currently have available to us.

Most banks offer a form of “overdraft protection”, charging a fee - usually between $20 to $30, although I’ve read that one bank charges as much as $38 per overdraft transaction – to cover transactions which exceed balances. The best way to avoid these fees, of course, is diligent account management. However, one forgotten trip to the gas station can throw an entire account balance out of whack. The way many banks process transactions, according to a USA Today article, is by charging you for the most expensive transaction first – if you find yourself in this situation, suddenly a bottle of water or pack of gum can wind up costing you twenty times its usual value!

Here are some tips to help you avoid this:

• Check your account balance often: Don’t just look at the monthly statements. Most banks allow you to check your account online, or do so over the phone.
• Some banks allow you to set up your own overdraft protection, connecting your checking account to your savings account. This method will still incur a fee, but it’s usually significantly less than the bank’s overdraft protection.
• Give yourself a monetary “cushion” in your checking account. By not letting your balance dip below $100, you could be saving yourself multiple headaches in the future.
• Read all mail correspondence your bank sends you: it may look like junk mail, but there may be a notice about some new fee you were previously unaware of.
• If your overdraft fee is a one-time mistake, talk to your bank about waiving the fee. If you’re a customer in good standing, they may be willing to do this, and it doesn’t hurt to check.
• Shop around: you may be better served by moving to another bank with less draconian fees.

If you have any additional tips to share on avoiding overdraft or other banking fees, I’d love to hear them.