How to Keep Overdraft Fees in Check

Overdraft protection seems like such a good idea.

Who wants the embarrassment that comes with bouncing a check?

But as Suzanne Barlyn recently recounted, one overdraft can quickly escalate into huge fees.

Besides, those pesky bounced checks aren't even the worst culprits.

Debit cards are.

Banks allow consumers' debit cards to overdraw their accounts for ATM withdrawals and store purchases, essentially rendering the responsible debit card nothing more than an expensive credit card -- one that carries an average fee of $34 per overdraft item.

The result: Consumers pay a total of $17.5 billion in annual fees for overdraft "loans," according to the Center for Responsible Lending.

And get this: That amount comes to $1.7 billion more than the overdrafts themselves!

Miracle of miracles, even Congress is taking notice. New York congresswoman Carolyn Maloney introduced legislation in February 2007 that would force banks to disclose the interest rates they charge on overdraft protection. The Consumer Overdraft Protection Fair Practices Act would require bankers to be more open with consumers about their fees. It also would force banks to require customer consent before initiating overdraft protection on an account. The law would halt the practice of posting the largest debits to an account first in order to generate more fees.

Before you break out any celebratory champagne, take note that a similar bill (H.R. 3449) by the same name languished in committee during the previous Congressional session, and was finally cleared from the books in 2006 without debate or vote.

Banks claim that overdraft protection is offered as a "courtesy"-- one that most clients appreciate. Congress isn't so sure. While it ponders (or doesn't ponder) the issue, here's what you can do to avoid triggering your own cascade of overdraft fees.

Avoid Overdrafts in the First Place.

Whether you keep track with an old-fashioned, hand-written ledger or rely on software such as Quicken or Microsoft Money, it's important to know how much (or how little) you have in your account. Balance your account every month. If -- like many Americans -- you've never balanced an account before, learn how at Family Education.com.

Double-check your balance a few times a month, either by phone or online. If your balance hovers dangerously close to the red line, you may even want to check more often.

Understand your bank's policies and the fee structure for your account. Most banks post fee information online; here are examples from Wachovia and Bank of America. Talk to a representative at your local branch if you have trouble finding your bank's policies online.

Prepare for an Occasional Overdraft.

Accidents happen. If you do overdraw, contact your bank's customer-service department. If your account has been in good standing, they may reverse some or all of the fees.

Meanwhile, consider a few of these alternatives to the "courtesy" overdraft-protection plan offered by your institution:

Link your checking account to a savings account.

For a small fee, money is transferred between accounts to cover any overdrawn transactions. Since it is your money, you aren't incurring any debt or taking on extra interest charges.

Open an overdraft line of credit.

The line of credit will automatically shift money into your checking account to cover an overdraft. You'll pay interest and (typically) an annual maintenance fee.

Link your checking account to a cash advance on a credit card you have with the bank.

You'll probably pay a transfer fee when you incur an overdraft, as well as interest costs on the money transferred into the overdrawn account.

One last thing: Community banks or credit unions tend to be more flexible than larger institutions. This is something to consider as you decide where to deposit your money.