How to Avoid Overdrafting Your Checking Account During Post-holiday Shopping

It's the day after Christmas. You grab the newspaper off of the front step, pour your morning coffee, and settle into the sofa to relax now that the holiday season is beginning to wind down to a close. Upon opening the newspaper, however, you find yourself overwhelmed with adds from dozens of department stores. Lured by the promises of 'Holiday Clearance', 'All Decorations 75% Off', and 'Biggest Sale of the Year', you grab your wallet or purse and head to the car for a day of great sales and impulse buys.

It's hard keeping track of your spending when you're in a frenzied rush to get those bargains- but be careful! Simple mistakes and miscalculations can lead to weeks of financial hardship once your bank hits you with bounced check and insufficient funds fees. Here are a few helpful tips that will help keep your bank account healthy during this time of year.

1. Keep a written record of all purchases.

It seems like a simple enough concept, but is often overlooked in the rush to move quickly from store to store. The best way to track your spending is to keep a paper register of all transactions performed on your accounts. Too often, people rely on their 'Online Banking' balance or the balance displayed at the ATM, neither of which are necessarily accurate reflections of what is available to be spent.

Why are ATM, Online Banking, and even your bank's customer service department unable to provide you with an accurate, to-the-minute balance on your account? There are two reasons: checks and Debit Card purchases. More detail on that in a moment.

Simply put, monitoring your own spending by keeping a written record of purchase amounts and account balances is the only way to be completely sure that you're not putting yourself in a financial hole.

2. Avoid writing checks.

When a check is written, the funds are not debited from your bank account until the payee cashes the check and it is presented against your bank account for payment. This can take days. At this time of year, sometimes weeks. If you tend to be forgetful when it comes to writing down all of your purchases, this can get you in some serious trouble.

When you check your account balance with your bank, there is no way for them to be aware of outstanding checks. The balance they provide includes only that which has already been deducted from your account. Keeping track of checks written is the responsibility of the customer, as the bank is incapable of doing so. If you don't want to take on that responsibility, especially at a time of year when things are already chaotic, then there's really only one option- leave the checkbook at home.

3. If you use your Debit Card, opt for Debit transactions rather than credit when given the choice.

When a transaction is made with your Debit Card, most merchants will provide the option to use the card as debit or credit. Debit purchases require the entry of your PIN, whereas credit purchases must (typically) be signed for. When provided with the option, always choose to use your card as debit. Why is that, you ask? Well, there are plenty of reasons.

When a purchase is made as a debit transaction, the full amount of the transaction is deducted from your available balance immediately and the purchase will post to your account as soon as your bank's systems update (generally, this occurs on the next business day).

When a purchase is made as a credit transaction, however, the merchant does not collect funds from your account for this transaction immediately. Your card is swiped, and a temporary hold is placed on your account, usually (but not always!) for the purchase amount. The merchant then has between 2 and 5 days to present their receipts and the authorization code for the transaction to the bank and actually collect that money from your account.

Many things can go wrong here. One common issue customers will encounter is that the amount that the merchant holds from your bank account balance is more than the actual purchase amount. As they have not actually collected any funds from your account, the bank will not be able to dispute the charges. At that point, you will need to do one of two things- contact the merchant and convince them to call your bank, provide information for the transaction and request that the hold be removed (a hassle at best, but usually close to impossible); or wait out the 2 to 5 days until the temporary hold expires and the money becomes available in your account once again.

Another issue with Debit purchases processed as credit is that the amount held by the merchant can be significantly less than the actual purchase amount. Gas purchases made as credit transactions, for example, typically result in only $1.00 being held from your available balance. The 'available balance' in your account does not take into account the full amount of that purchase- but many assume it does.

Lastly, the hold on your account is only temporary. Once the 2 to 5 day time frame has elapsed, if the merchant does not collect the purchase amount from your
account, the money is once again included in your 'available' balance. Give it a few days, however, and the merchant WILL collect the full purchase amount from your account. If you've already spent it, too bad! You're account is now overdrawn.

To clarify, here is a typical scenario. A customer has $50.00 in their bank account. They go to the gas station, purchase gas, and a $1.00 hold is placed on their account. They call the bank and request to know their available balance, and are told they have $49.00 available. Over the next three days, they make a number of small purchases with their Debit Card, all processed as credit, and deplete their balance entirely. At the end of day three, their account balance is zero, and no transactions have posted.

They wake up the next morning, and their account is $400.00 overdrawn. Why? Well, all of the transactions posted overnight. The $50.00 gas purchase finally came out of their account. Ten small purchases they made, thinking they had an 'available' balance of $49.00 are deducted next- already $49.00 in the hole. And then, for each transaction, the bank will charge a fee anywhere between $25 and $40.

Simple solution? Use your Debit Card as debit every time the option is available. The full amount is deducted immediately, and comes out the next business day without fail. No surprises.

4. Call your bank to ensure that the overdrafting of your account when using your Debit Card is not permitted.

Many banks allow some customers, depending upon their account history, to overdraw their accounts by a set amount using their Debit or ATM Card for debit transactions. The only way to know for sure about this is to call your bank and ask. If they do allow this, find out the fee amounts for each purchase which overdrafts the account. You'll most likely decide that having this 'convenience' (which is how they will present this feature) is not worth what you'll end up spending if you ever need to utilize it. The ability to overdraft your account is typically able to be cancelled upon request.

5. Apply for Overdraft Protection

Speak with your bank regarding their overdraft protection options. Different banks have different guidelines and rules for this. Some will allow you to simply link your existing accounts together. Some will require you to apply for a line of credit to link to your account. And others will require a new account be opened, and money deposited for use solely in the event of an overdrafting of your account. More often than not, this protection is completely free, and can save you hundreds, sometimes thousands, in overdraft fees.

6. Use Cash

If all of this seems too complicated, there is a simple solution: put away the checkbook, cut up the plastic, and use cash only. You can set aside a certain amount of cash for spending, and leave the rest at home. Once it's gone, it's gone- no fees, no negative balances, no worries.

People who use cash as opposed to Debit Cards or checks are also more likely to spend their money wisely. If you have a stack of bills in your wallet when you leave the house, you are very conscious of that stack growing thinner throughout the day. However, when using your Debit Card or writing checks, you lack the visual of dwindling dollars that only carrying cash will provide.