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7 ways to avoid being trapped into overdraft fees

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Overdraft fees remain a huge revenue source for banks despite financial regulations. They are enormously profitable for banks. According to a report by the Consumer Financial Protection Bureau, 628 large banks that are required to report overdraft and insufficient fund fees said the charges totaled $11.16 billion in 2015.

Overdraft fees are so profitable for banks that it’s now in their interest to push customers toward overdrawing their accounts, especially customers who tend to have low balance accounts. Fees can be as much as $35 per overdraft. Some banks even charge a fee of $2 to $5 per day until your account regains a positive balance.

Banks aren’t supposed to charge customers overdraft fees when they use an ATM to get cash unless the customer chooses to “opt in” to get cash despite the fee. But banks can still levy a non-sufficient funds (NSF) fee if your balance goes negative because a check is cashed or an ACH transactions goes through and there aren’t sufficient funds to cover it.

When customers make a number of debit-card purchases or automated-teller-machine withdrawals in a single day that exceed their checking-account balance, they can incur multiple overdraft fees that day. Some banks increase the overdraft fees people incur in a single day by reordering their transactions, according to a report released earlier this month by Pew Charitable Trusts, a nonprofit public-policy organization.

7 ways to avoid being trapped into overdraft fees

1. Refuse overdraft protection. Check the fine print of your account agreement to verify if you are enrolled in a courtesy overdraft or bounce protection program. This is not the same overdraft protection where you have a separate account that covers overdrafts or the bank extends a line of credit to cover overdrafts. Many banks and credit unions enroll customers into courtesy overdraft program where they will pay for transactions but it will cost you an overdraft fee. It’s really no courtesy at all — they are making big bucks off that “courtesy” to you.

According to Pew Charitable Trusts, a 2014 survey showed many bank customers don’t understand the overdraft-coverage form they are given to sign when they open a new bank account. Some 52% of people who overdrew with their debit card and were charged a fee in 2013 didn’t recall opting into this coverage. Consumers who repeatedly overdraw their accounts should consider revoking their selection—something that bank customers can do at any time, says Susan Weinstock, director of the consumer-banking project at Pew.

If you are enrolled in a fee-based debit overdraft program, you can change your mind at any time. Just notify the bank or credit union that you don’t want debit overdraft coverage. If you do not believe you’ve authorized debit overdraft protection, and the bank or credit union charges you a debit overdraft fee, you may file a complaint. For customers not enrolled in a debit overdraft program, the bank or credit union will decline ATM or debit card transactions when your account doesn’t have enough funds to cover them, and you will not be charged a fee when this happens.

2. Cushion your account. Protect yourself by adding a small cash cushion to your account every month. This can really help if you get caught by overdraft fees due to small amounts. Because many people no longer use check registers and most transactions are electronic, point of sale or ATM/debit card transactions, it’s challenging to keep up transactions. Check registers have become obsolete. A small cushion of just $50 may save you from overdrawing your account.

3. Review your monthly statement. Don’t assume everything on your bank statement belongs to you. There could easily be errors that can go unnoticed for months. Suppose your debit card was hacked but you are unaware. Hackers are very astute. Some deduct small amounts monthly from unsuspecting consumers. Be sure to contact your bank if you have any questions or find an error in your checking account statement. Routinely check your balance online or by calling your bank.

4. Sign up for online alerts. If you sign up for online alerts with your bank or credit union, you will receive an email when your checking account balance dips below a certain limit like say $25 or less. This will help you know when to add more cash to your account.

5. Sign up for true overdraft protection. Refuse the bank’s “courtesy” overdraft protection program and sign up for a true overdraft protection program that is linked to a savings account, line of credit, or credit card. This is a guaranteed protection if you overdraw your account that will not cost you an overdraft fee for covering transactions. “Bounce coverage” and “courtesy overdraft protection” programs are operated at the bank’s discretion. So there’s no guarantee that every overdraft will be covered and you could still wind up bouncing a check.

6. Avoid using debit cards to buy gas, check into a hotel, or rent a car. These merchants place a hold on your checking account when you pay by debit card. The hold can be for the full amount of the bill or more. While no money actually leaves your checking account, a hold does limit your available balance for a few days. Just one $50 block from a gas station could be enough to overdraw your account.

7. Request your bank waive the fee. If you overdraw your account call your bank and request that they waive the overdraft fee. It can be done and some banks even allow one courtesy waive of an overdraft fee per year.

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