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.
I don’t use a debit card and did choose to keep the overdraft protection. Some of my deposits and withdrawals are automatic and the overdraft protection provides the assurance that if the timing gets off on one of them due to the way a weekend falls that my bills will get paid and not returned.
There’s nothing wrong with overdraft protection, so long as you understand the fees that are attached to it.
Thank you for taking the time to post this article. When we recieved the notice from our bank about the change in overdraft fee coverage, neither of us opted in.
Neither of us has ever written a hot check, so maybe the fear of embarrassment that you mention never really entered our minds. For us, though, I opted to simply open a savings account that the bank would draw from in the case my checking account was too low. My husband, on the other hand went for the credit line route.
I think the credit line option is a great idea for many people, because the interest doesn’t usually amount to the same as the overdraft priviledge charge. That being said, neither do many company’s cancelled check fees. The overdraft fees of my bank are $34, and the cancelled check fees at most of the businesses in town are only $20.
Anyway, great article.
I declined the overdraft protection. I figured if I needed it – I am in trouble and want a heads up rather than get hit with multiple 30 buck fees.
ING Direct does it up right…they give every checking account a line of credit for like 150 to cover if you go a little too deep.
I simply put an extra $500 in my checking account and don’t include it in the balance. That way if I go a little bit over, I don’t have to worry. Also helps avoid the monthly fee when the overall balance gets too low.
We have a certain amount in our checking we consider a “floor” and don’t go under it.
Khaleef @ KNS Financial says
As you already stated, I think the best alternative to this is to have a cushion (or buffer) in your checking account. I would suggest $500 if you have any automatic payments set up, or a fair amount of transactions each month.
Each person needs to know what their bills are and figure out how much they need to cover in case of an overage.
Bear in mind, I think the goal is to not go over ever but these things do happen.
Jeff Jerwell says
Just FYI, I did not opt-in for the overdraft protection as a conscious choice. A couple days ago, I got a call from my local bank, advising me that a charge had to be “returned” because it would have overdrawn my account. After I got home, I called the bank with my balance details as I understood them, and they admitted they’d made a mistake by failing to properly credit a cash deposit.
The kicker is that had to reverse the $35 “Returned Item Fee” they’d charged me. That’s right, they charged the exact same $35 dollar fee as they would have for covering the “overdraft” in the good old days… they just called it something new.
Banks will screw you any way they possibly can, laws and reform be damned.
Incidentally, I noticed on my statement that this year they’ve charged $105 in NSF charges (what they called it when they covered it) and $35 in Returned Item charges (the new name) and have had to re-credit all $140 of them because they were all bank mistakes.
The jar buried in the backyard looks better all the time.
Ouch! One mistake is one thing but once there are more than that then I think it’s time for a new bank!