Tips for Avoiding Overdraft Protection
June 11th, 2010 | Author: weissheiss
Now that the Federal Reserve’s new rules went into effect as of August 15, 2010, banks can no longer automatically enroll their customers in overdraft protection plans for debit cards tied to checking accounts or prepaid card plans.
Now you have to “opt in” or agree to overdraft protection. Otherwise, your debit card will simply be declined at the point of the sales if you don’t have enough money in your account to cover the purchase.
Having your card declined is a good thing, because it prevents you from overspending and it prevents overdraft charges from being applied. Banks were making a huge profit on overdraft charges. They have pulled every marketing trick in the book to ensure that the majority of their customers opt-in to overdraft plans by putting big WARNING notices in e-mails and on the customer log-in pages of bank websites implying that you MUST ACT NOW. Actually, you don’t have to do anything, and you will not be exposed to the risk of overdrafts and the associated fees.
Many people have opted in to overdraft “protection” despite having to pay as much as $35 per overdraft. Let’s say you do not realize your account has insufficient funds and you are out shopping. It is very easy to accumulate 3 or 4 overdrafts and have $100+ in fees, putting you even further into the red.
Tips for Avoiding Overdrafts
Use a Line of Credit
Similar to overdraft protection, a line of credit means a bank will give you a loan to cover purchases that you make should you overdraw your checking account. Instead of that $35 per overdraft, the bank will just charge you interest on the money borrowed. This is nominal. You might also pay a fee for using a line of credit, but it will be lower than paying any overdraft charges.
A line of credit with a bank can run anywhere from $500 to $2,000, with $500 being more typical. Be aware that getting a line of credit involves a credit check, and if you have a low credit rating, you may not have access to this option
Keep a Cushion in your Checking Account
Just pretend that the last $200 in your checking account is not there, and this will create a cushion should you miscalculate your deposits and withdrawals. You won’t pay any fees for dipping into this cushion, and if you have bed credit, you won’t have to worry about the credit check hurdle.
Of course, it isn’t easy for everyone to keep extra money in their account. It takes discipline to know that the money is not really there to spend but just to cover yourself. As long as you do not “overdraw” your account by more than the amount that is your backup funds, you won’t have to worry about overdraft fees. Keep in mind that if you do spend it, you will need to replace it to continue having the benefit of the cushion.
Connect Your Savings Account to Your Checking Account
A lot of banks will connect a savings account to a client’s own checking account. In this way, your bank will automatically transfer funds from savings into checking to cover any overdrafts. They usually do this in $50 increments. Some will not charge a fee if you keep a certain balance in savings, say $1,000. Others might charge you a $50 annual fee for the service. It might be worth it to you to pay an annual fee to know you won’t be exposed to the possibility of far higher overdraft fees throughout the year. You can also on your own initiative move money out of savings into checking to prevent the automatic transfer from kicking in. Nowadays it is particularly easy to transfer funds between accounts online.
Posted in Debit Card Protection | 
Tags: Bank Websites, Banks, Credit Check, Customer Log, Debit Card, Enough Money, Overdraft Charges, Overdrafts