How to Avoid Banking Overdraft Fees

In our current economic environment, money is tight and budgeting is ever more important. I recently met with a customer service representative at my bank to ask her a few questions.

In general, has the bank seen an increase in account overdrafts?

Has there been a surge of new customers overdrawing their accounts (not including the regular culprits)?

She answered yes to both questions. Banks typically have repeat customers who overdraw their accounts on a regular basis. She stated that the number of overdrafts for these customers has somewhat increased, but more noticeably are the number of customers overdrawing their accounts that normally do not.

So how can you save money by keeping your bank account in the black and avoid costly overdraft fees? There are several methods and most often your bank can provide you with the guidance you need.

The obvious answer is not to spend more than you earn. But this can be easier said than done. Most banks process their transactions electronically now. This means your payments, checks included, are clearing faster. When your credit card bill is due two days before your automatic payroll deposit, don't assume that the deposit will hit your account first. Some transactions, again including checks, have the capability of posting on the same day you issue them.

Let's look at some of the available options.

Overdraft Protection. This is a great backup protection plan. If an item clears your account and the funds are not available to cover it, your overdraft protection will kick in, usually in $100.00 increments. Overdraft Protection Plans are considered revolving lines of credit. Once funds are accessed, a minimum payment will also be deducted from your account on a monthly basis until paid in full. Or you may choose to pay off the balance at any time. There is interest attached to these plans, but only when you draw from the reserve. Keep in mind that the interest paid is usually far less than any overdraft fees you may incur. You may also need to complete a credit application and qualify for this product. Check with your financial institution about the particular overdraft protection plan they offer. Product guidelines will vary from one bank to another.

If your credit is less than stellar, there may be another option available called a Savings Overdraft Protection Plan. With this product, you simply fund your own reserve via a savings account and you authorize the bank to withdraw from it on your behalf should your checking balance fall negative. Typically, authorized withdrawals are in $100.00 increments, the same as a consumer overdraft protection plan. Instead of paying interest and having monthly payments taken from your checking account, many of these plans incur a flat fee each time the funds are accessed to cover your overdraft. Of course, if the funds are not available in the savings account, this will not prevent you from overdrawing your checking account. Check with your bank, as not all financial institutions offer this product and product guidelines will vary from one bank to another.

The Self Approach. If you can be diligent in doing so, you can create your own overdraft protection plan. All you need to do is "hide" money in your checking account. You can build up this reserve over time by simply reducing your available balance in your check register. Ask your banker for an extra blank register and use it to keep track of your "extra" money. If it's not visible in your main register, you'll never miss it and you won't be tempted to use it.

Tracking is easiest if it is done in even increments. For example, If your true balance is $750.00, you would show $650.00 in your regular use register and $100.00 in your hidden funds register.

Having hidden money tucked away, yet still in your account helps to cover accounting errors or transactions you may have forgotten to record.

By following one of these methods, you can avoid overdrafts and the costly fees associated with them.

According to Reuters.com, in total, banks and credit unions charge over 37 million dollars annually for overdraft fees. The average person overdraws their account 12 times per year, paying an average of $368 in annual fees. The average household pays an average of $1,472 in NSF fees annually. In this economy, I'm sure everyone would agree that that money could be better used in the consumer's pocket.