Young debit card users pay $1 billion in overdraft fees

Young adults aged 18 to 24 rely on debit cards to pay for everything from coffee and snacks to school supplies.

And millions are getting slammed with hefty overdraft fees. According to the Center for Responsible Lending, young adults pay almost $1 billion in overdraft fees each year.

One billion dollars is a heck of a lot of fees. How can this be happening?

First of all, an overdraft fee can be as much as $35. So if you overdraw your checking account by even a few pennies, you could be zapped with a $35 fee.

Plus, young adults like to use debit cards to make small purchases, often $5 or $10 and sometimes even less. In fact, seven out of ten young adults say they would use a debit cards for a purchase of $2 or less.

And if you make several small purchases when your account is the least bit overdrawn, you could wind up paying multiple overdraft fees.

Let’s look at an example. Let’s say your bank charges a $35 overdraft fee. You overdraw your checking account by $20, by making five small debit card transactions over a couple of days. Your bank would charge you five separate $35 overdraft fees for a total of $175 in fees.

One college student learned this lesson the hard way. He spent $17 on his debit card on coffee and other small purchases over a four-day period while studying for exams. With those seven small purchases, he had overdrawn his checking account by $13. His bank charged him seven $35 overdraft fees for a total of $245 in fees.

With penalties this high for mismanaging a checking account, it’s never been more essential to keep close tabs on your checking account balance. Protect yourself from hefty overdraft fees by following these tips:

Keep your check register up-to-date. Record all checks when you write them and every single ATM and debit card transaction as you make them. Adopting this one habit can make a huge difference in your financial life. It’s really easy to overspend when you don’t know your balance. Keep track of all your checking account transactions as you make them. At the very least, record your daily transactions at the end of each day.

Keep track of fees. Don’t forget about fees. Do you pay a monthly fee with your checking account? Did you withdraw cash from a different bank’s ATM? If so, be sure to make note of any fees charged by your bank in your check register. Several $2 and $2.50 fees per month can really add up.

Review your account statement every month. If you have any questions or find an error in your checking account statement, be sure to contact your bank. Between statements, check your balance online, at the ATM, or by calling or visiting your bank. If you have any doubts about your true account balance, hold off on any big purchases until you’re able to balance your checkbook.

Stash some cash. Protect yourself from overdraft fees by adding a small cash cushion to your account. Put a small amount of money into your checking account and keep it there from month to month, say $100 or any amount you feel comfortable with. Even $50 will do.

Ease up on using debit cards for small purchases. While using your debit card to pay for small purchases is certainly convenient, it can make balancing your checkbook a real headache. The reason? Signature-based debit card transactions aren’t deducted from your checking account for two or three days, so you’ll have a whole lot of “pending” transactions to consider whenever you check your balance. When it comes to small purchases, pay with cash whenever you can.

Sign up for online alerts. When your checking account balance dips below a certain limit, say $40 or $50, you’ll receive an email from your bank or credit union. And you’ll know it’s time to add more cash to your account pronto.

Use automatic payments. Setting up automatic payments from your checking account for utilities, loans, and credit card bills is a great way to go. That way you’ll have fewer checks to write each month and fewer checks clearing from your account. With automatic payments, you can specify the exact date that the money leaves your account. Be sure to make note of all automatic payments in your check register.

Steer clear of “bounce coverage” and “courtesy overdraft protection.” Many banks and credit unions enroll customers into courtesy overdraft programs when they open their checking accounts. But there is nothing polite about the fees associated with these programs. Customers are charged $20 to $35 per overdraft. And some banks charge a fee of $2 to $5 per day until the account regains a positive balance. Not sure if your bank did you the courtesy of enrolling you in a super-expensive protection program?  Check the fine print of your account agreement or call your bank and ask. If you are enrolled, ask to opt-out of the program. Be sure to follow up in writing.

Sign up for true overdraft protection. Rather than accept a pricey courtesy overdraft protection program, sign up for the real deal – an overdraft protection program linked to a savings account, line of credit, or credit card. You’ll pay an annual fee for this service and a small fee for each overdraft but you’ll be guaranteed protection if you should overdraw your account. “Bounce coverage” and “courtesy overdraft protection” programs are operated at the bank’s discretion. So there’s no guarantee that every overdraft will be covered and you could wind up bouncing a check.

Avoid using debit cards to buy gas, check into a hotel, or rent a car. These merchants place holds or blocks on your checking account when you pay by debit card, often the full amount of the bill plus twenty percent or more. While no money actually leaves your checking account, a block does affect your available balance for a day or two. Just one $50 block from a gas station could be enough to overdraw your account.

Contact your bank as soon as you slip up. Everyone makes mistakes. If you overdraw your account, deposit enough money into your account to cover the overdraft and any fees charged by your bank as soon as you possibly can. If it’s your first slip-up, call your bank and ask that they waive the overdraft fee.

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