As of August 15th 2010, banks are no longer allowed to automatically enroll customers into overdraft protection plans for their checking accounts, according to the Federal Reserve’s new regulations. This means you have to “opt-in” or agree to overdraft protection or else your debit card will be declined when you’ve overspent.
Many people choose to keep overdraft protection, despite having to pay $30 to $35 in overdraft fees for every transaction that overdraws their checking account, simply to avoid the potential embarrassment which results should your debit card be declined at the register.
If you’ve chosen to keep your overdraft protection, here are a few tips for not having to use it!
Use a Line of Credit
A line of credit is kind of like overdraft protection. Basically, a bank will give you a loan to cover purchases that you make that overdraw your checking account. Instead of $30 to $35 per transaction overdrawn though, the bank charges you interest on the money borrowed. Some banks also charge small fees for using a line of credit – but they are always lower than the overdraft charges.
A credit line from a bank is normally around $500 but some banks give you up to $2,000. Not everyone will be approved for a line of credit, though, as it involves a credit check and is a lot like applying for a bank loan. If you have poor credit, this option may not help you avoid overdraft fees.
Establish Your “Own” Line of Credit
If you can keep extra money in your checking account, you essentially are creating your own line of credit. There are no fees for using your own money, and no interest to pay! You don’t need a credit check!
It’s not easy for everyone to keep $100 or more as a buffer in their checking accounts though. Mentally, you know it’s there, and it can be tempting to use it. If you’re going to try this method of avoiding overdrafts, you’ll want to deposit some extra money and don’t include it on your checking account register, until you mistakenly overdraw your account. Then you can add it in, subtract your transaction, and see what you have left. As long as you don’t overdraw your account by more than the amount you deposit as your “line of credit”, you should never have overdraft fees from the bank.
Keep in mind when you do use your extra cash, you’ll need to make another deposit for the next time you accidentally overdraw your account.
Connect A Savings Account With Your Checking Account
If your bank allows it, connect your savings account with your checking account. This way, your bank can automatically transfer funds from your savings to your checking to cover purchases you make which overdraw your checking account. This is similar to keeping a “buffer” of money in your checking account, except you’re actually keeping the money separate until the moment you need it.
Banks usually charge a fee for this service (around $10 each time they move money from your savings to your checking account for you) but it’s less than the overdraft fee. Also, if you know you may be close to overdrawing your checking account, you can manually transfer money (usually for free) from one account to another and avoid all fees completely.
Debbie Dragon is a freelance writer for DepositAccounts.com, where you can compare rates of savings accounts from dozens of banks in one place.