As of August 15, 2010, the banks and credit unions will no longer pay debit and ATM charges if you do not have enough money in your account. Instead the purchase will be declined.  If you want to continue receiving overdraft protection, you must opt-in to your bank’s overdraft plan. Banks and credit unions are beginning to send out notices for opting-in or out now.

If you decide to opt-out, you will be allowed to opt-in later. You can also cancel your opt-in agreement at any time.

Currently, if you have Overdraft Protection, and you use your ATM card to make a purchase or withdraw money and you do not have enough funds in your account, the bank or credit union will allow the purchase to go through, but will charge you an overdraft fee. These fees can be as much as $20-$30 per transaction. If you make several purchases without enough money in your account, the fees can really add up.

The new laws do not cover checks or automatic bill payments. The bank may still automatically enroll you in their standard overdraft service for these types of transactions or they may require that you make a choice to opt-in or out of this service as well. If you do not want the standard overdraft coverage, talk to your bank. Some banks allow cancellation of the coverage and others do not.

Whether you decide to opt-in to debit and ATM overdraft protection, it is important to remember that every dollar you pay in fees is a dollar you lose. It may have gone towards your retirement, vacation, new car, new house, etc. If you are struggling to make ends meet and need help managing your money talk to a certified credit counselor.

This year banks are expected to earn $17.5 billion* from overdraft fees. The best way to avoid banking fees is to know your banks policies and, of course, manage your money carefully.

Overdraft protection

Overdraft protection or courtesy overdraft programs at banks are a very common practice. It works like this: a consumer does not have enough money in their account to cover purchases, so the bank pays for the purchase and charges the consumer a fee, anywhere from $17 to $39. Unfortunately, for many people the practice has reduced their bank accounts to a never ending circle of debt repayment. 

Here are some great questions to ask your bank about policies impacting overdraft protection or overdrawn accounts:

1. Posting debits – Ask the bank how they post debits (purchases) to your account. Some banks will post the largest purchases first causing several small purchases to overdraw your account. You will be charged a fee for each item that overdrafts.
2. Posting Credits – Does the bank post credits before they post debits? What time do credits (deposits) have to be received by the bank in order to post to your account the same day?
3. Hold times – Banks will often hold checks before allowing you to use the money. They want to know the money is really there before you use it. Most banks have a hold time on paper checks, but not direct deposit.
4. Daily fee – Does the bank charge fees for everyday that your account is overdrawn?
5. Transfers from savings – Can you link your savings account to your checking account to cover overdrafts? If you can, is there a fee associated with the transaction?
6. Does the bank ever allow an overdraft fee to be waived? If you have never overdrawn the account before, it is a good idea to ask if they will waive it this one time.

No Protection

If you do not have overdraft protection and you cannot pay a check you wrote, the bank will charge you an NSF (non-sufficient funds) fee and so will the people or business to which you wrote the check. In this situation having overdraft protection may help you avoid even higher fees and, in some extreme cases, jail.

Other Fees

In addition to overdraft fees bank accounts may have many other fees associated with them. These include:

1. General fees – Does the bank charge a monthly fee for having the account?
2. Is the monthly fee based on the balance you have in your account?
3. NSF fee – How much is the NSF fee?
4. ATM fees – Do they charge you for using another banks ATM?
5. Online fees – Is there a charge to access your account information online?
6. Bill pay fees – Do they charge for paying bills or transferring money online?
7. Tele-banking fees – Are there fees for calling and requesting banking information?
8. Teller fees – Are there fees for discussing your account with a teller?

Finally, the best way to avoid paying unnecessary fees to your bank or business where you shop is to manage your finances.

• Keep track of your expenses. Use a check register, notebook or electronic spreadsheet to record checks you’ve written, automatic payments, debits, or other fees (ATM, bank, etc.) being subtracted from your account.
• Periodically check your account throughout the month to see if checks and automatic payments have been deducted.
• Review your monthly bank statement and remember to subtract any outstanding debits or checks that are not shown on the statement. Add in any deposits that are not shown.

Shop around when selecting a bank. People tend to feel that the local, home town banks typically charge less fees; that is not always the case. Check out local banks, national banks, and credit unions when trying to find the best deal.

Take the time to ask questions and understand how much the bank will charge you to access your money. In the end the money you save may be the difference between an overdraft charge and a positive account balance.

* Center for Responsible Lending. 2009. Quick Facts on Overdraft Loans. http://www.responsiblelending.org/overdraft-loans/research-analysis/quick-facts-on-overdraft-loans.html (last visited July 28, 2009)

1. Extra Bank Accounts – Get rid of all those extra bank accounts. If your money is scattered into too many accounts you risk not being able to accurately track your finances. One linked checking and savings account should suffice. This means less statements and paperwork to deal with!
2. Direct Deposit – Time is money. If your company offers direct deposit consider taking advantage of it! It’s as simple as providing a voided check. Each month your paycheck will be automatically deposited into your account. You’ll save valuable time avoiding bank lines on payday and will be less likely to take out extra cash when you deposit your check.
3. Automatic Payments- With automatic payments, you give authorization to billers to take money directly from your account. This is an excellent way to manage routine bills such as mortgage and car payments. Automatic payments can be set up with a debit card or on-line. Many people are wary of automatic payments, however, federal laws are in place to protect your account.
4. Overdraft Protection – Bounced checks are an unnecessary expense. There may be a small annual fee to set up overdraft protection, but it is typically less than the cost of even one bounced check. Good money management will help you to avoid going into overdraft.
5. Invest in the Future – Consider increasing your 401k or IRA contributions. If you have 401k plans from former employers, you may want to roll them over to your current plan. Again, you’ll have fewer accounts to track and can avoid maintenance fees sometimes charged if an account falls below a certain level.
6. College Funds – Save for your children’s future now. Even a few dollars a month will put a dent in future tuition costs. Check out your state education savings funds.
7. Credit Cards – Reduce the amount of credit cards you hold. This will not only help you control spending, it will lessen the chance for identity theft and account errors. Review your credit report at least annually to ensure you are eligible for future loans. Click here for how to get your free credit report.
8. Portfolio Review – Take an inventory of your stocks and mutual funds and monitor performance periodically.
9. Personal Finance Programs – Using software or a service is a great way to track your spending! You can track earnings, debt, retirement contributions, net worth, etc, all in one format. These programs can convert your financial data into pie charts and bar graphs. Having this visual is extremely helpful. They also allow you to set up alerts for when bills are due and can warn you when an account it getting low. You can easily customize the software to fit your needs. Check out Mint.com, they offer a free and user friendly service.
10. Organize – Create a filing system that works for you. Office supply stores offer a variety of options. Have a place for new bills, statements, paid bills, tax returns, etc. Once a year archive and/or shred statements and receipts you no longer need. Being organized is key to the success of every tip above!

Please feel free to share your own tips with our readers!