Not that long ago, the amount of money in your checking account was a true limit. Any transaction that would push you beyond your balance would be rejected by your bank.
If you didn’t have enough cash in your account for an ATM withdrawal or debit card purchase, your bank would decline the transaction.
If you wrote a check that exceeded the dollar amount in your checking account, the check would bounce and you’d be hit with a hefty fee.
And while non-sufficient funds (NSF) fees still exist, more and more banks are charging overspending customers with overdraft fees instead.
With overdraft fees, your bank will let you make an ATM withdrawal, debit card purchase, or write a check for more cash than is in your checking account. However, you’ll pay for this privilege — as much as $35 per overdraft. Some banks charge a fee of $2 to $5 per day until your account regains a positive balance.
Overdraft fees bring in big, big profits for banks. How big? The Center for Responsible Lending estimates that Americans now pay $17.5 billion per year in overdraft fees.
To guard yourself against these fees, consider these tips:
1. Keep your check register up-to-date. Record all checks when you write them. Also record all ATM/debit card transactions. Dont forget about fees. Do you pay a monthly fee with your checking account? Did you withdraw some cash from another banks ATM? If so, be sure to make note of any fees charged by your bank. Several $2 and $2.50 fees per month can really add up.
2. Use automatic payments. Setting up automatic payments from your checking account for utilities, loans, and insurance bills is a great way to go. That way you will 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.
3. Review your account statement every month. Be sure to contact your bank if you have any questions or find an error in your checking account statement. 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 are able to balance your checkbook.
4. Stash some cash. Overdrawing your checking account by even a few pennies can trigger some hefty fees. Protect yourself 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.
5. Sign up for online alerts. If you sign up for online alerts with your bank or credit union, you will receive an email when your checking account balance dips below a certain limit, say $50 or $100. This way, you will know it is time to add more cash to your account pronto.
6. 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.
7. 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 might pay an annual fee for this service and a small fee for each overdraft, but you will be guaranteed protection if you 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 still wind up bouncing a check. Be sure to read the fine print when signing up for one of these services.
8. 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 and 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.
9. Avoid using debit cards for small purchases. When you are making a small purchase, pay with cash. Using debit cards for small purchases can make balancing your checkbook a real headache, especially if you make several signature-based debit card transactions a month. The reason? Signature-based debit card transactions wont be deducted from your checking account for two or three days, so you will have a whole lot of “pending” transactions to consider whenever you check your balance.
10. 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 can. If it’s your first slip-up, call your bank and request that they waive the overdraft fee.
Bounced checks can be embarrassing and expensive. But if you follow these ten tips, hopefully you wont have to face them anytime soon.