Sunday, October 25, 2009

6 ways to prevent bank overdraft fees

By Tamara E. Holmes

Years ago, if you balanced your checkbook and monitored your ledger, you wouldn't have to worry about overdrawing your bank account. But with the widespread use of debit cards, many are finding that avoiding overdraft fees is not as easy.

5 ways to protect yourself from overdraft fees

Congress and the Federal Reserve are both considering ways to make banks revise their overdraft policies. Until they act, here are six ways to protect yourself.

  1. Know your bank's policies.
  2. Opt out of overdraft protection.
  3. Remember: Danger may lurk at a POS
  4. Be wary of holds.
  5. Enlist technology.
  6. Plead your case.

Banks and credit unions collected nearly $24 billion in overdraft fees in 2008 -- 35 percent more than two years earlier, according to a study by the Durham, N.C.-based Center for Responsible Lending. But armed with a little knowledge, "consumers are in control," says Nessa Feddis, vice president and senior counsel for the Washington, D.C.-based American Bankers Association. Here are six ways to protect yourself from debit card overdrafts:

1. Know your bank's policies
Don't assume your bank will stop you from withdrawing money if you have insufficient funds. Thirty-five percent of financial institutions let their customers overdraw their accounts at ATMs or with debit cards, and charge a median of $26 per overdrawn transaction, according to economic research firm Moebs Services of Lake Bluff, Ill.

"Generally, smaller institutions and credit unions are more apt to have lower fees and fairer policies," says Gail Liberman, co-author of "Quick Steps to Financial Stability." Some banks process the largest charges first regardless of the order in which items were purchased. So if a large purchase drains your account, and you then buy two $4 cups of latte, you're likely to be hit with overdraft charges for each cup.

Some banks are making their overdraft policies friendlier. For example, Bank of America announced last month that it would not charge overdraft fees on more than four items per day nor would it charge them on an account overdrawn by less than $10 a day. J.P. Morgan Chase also last month said it would levy overdraft fees no more than three times a day and would not charge customers for accounts overdrawn by $5 or less. Though the changes may save some consumers money, overdrafts will still be costly, says Kathleen Day, a spokeswoman for the Center for Responsible Lending. "You go $10.01 over your account balance, and you're still slammed with the overdraft fee," she says.

2. Opt out of overdraft protection
There's a good chance that your bank account is enrolled in some type of overdraft protection program even if you haven't asked for it. Under fire from the Federal Reserve Board and Congress, some banks -- such as Chase and Bank of America -- are revising their overdraft policies to require new customers to opt in when they open an account. But as Day points out, "That doesn't do anything for the millions of customers already ensnared in this."

If you find yourself racking up overdraft fees, you have a couple of options. You can opt out of the program and have your charges denied if you overdraw on the account. Or you can have your checking account linked to your savings account or a line of credit, advises Liberman. Though utilizing a line of credit will cost you money in interest, the amount will likely be less than the overdraft fee, and you can deposit money into your account to cover the shortfall immediately, avoiding further interest charges.

3. Remember: Danger may lurk at a POS
Many consumers think -- and rightly so -- that taking cash withdrawals at a retail store's point of sale (POS) is a smart move, because it avoids bank ATM fees. True enough, but the POS has also become a profit center for banks. That's because the point-of-sale terminal at the typical retail store won't signal you that you're about to pull out too much money and trigger an overdraft fee. The Center for Responsible Lending says that point of sale transactions are the leading cause of overdraft fees, generating about 38 percent of them.

4. Be wary of 'holds'
Sometimes when you use your debit card to make a purchase, a vendor will place a "hold" on your account to ensure that you don't spend that money before the bank processes the charge. Unfortunately that hold may be for more than you actually spent, particularly for purchases in which it's unclear what the final bill will be, such as use of the gas pump or a stay at a hotel, says Feddis. While the hold can't stay on your account for more than three days, that's plenty of time to overdraw an account, particularly since there's typically no indication that some of your funds are temporarily unavailable.

You go $10.01 over your account balance, and you're still slammed with the overdraft fee.

-- Kathleen Day
Center for Responsible Lending

To avoid being penalized for holds on your account, use your debit card's PIN transaction feature for purchases rather than the signature feature. "Those are two different systems," Feddis says. When you enter your PIN number and use your debit card as an ATM card, the money is withdrawn from your account directly and no holds are placed on your account. By using the PIN transaction feature exclusively, you'll always know how much money you have available as long as you keep your ledger updated.

If you do tend to use your debit card's signature transaction feature, one way to protect yourself from overdraft fees is to keep an extra $100 to pad your account so you have a little cushion, says Liberman.

5. Enlist technology
Some people have a hard time keeping track of their balances. If you're one of them, "many banks will allow their customers to arrange for an alert to be sent to them by text message or e-mail if their balance falls below a certain amount," says Feddis.

6. Plead your case
If you do find yourself hit with overdraft fees, don't assume it's an automatic loss. Call your bank to see if they'd be willing to give you a break, particularly if it's not a common occurrence.

"Institutions trying to keep their customers will waive the fees and often the branches have discretion on these issues," says Liberman. If your bank is unsympathetic, consider taking your business elsewhere, she adds.