Most banking customers know how costly overdraft fees can be. But with banks relying on those fees to an increasing extent, it's more important than ever to avoid overdrafts once and for all.
According to a report released this week from the Consumer Financial Protection Bureau, overdraft fees and other charges related to insufficient funds made up 61 percent of all service charges on consumer deposit accounts during 2011. Those fees added up to an average of $225 in total overdraft fees paid for every customer that overdrew a checking account during 2011.
A more recent analysis cited in the CFPB study estimated total overdraft and NSF fees at $32 billion in 2012, and the CFPB believes that community banks likely get an even higher percentage of their fee revenue from overdraft fees.
In fact, the CFPB study showed that frequent overdrafters who chose not to opt in for overdraft protection saw a much greater reduction in fees than those who opted in to receive the service -- amounting to extra savings of $347 for those with 10 or more overdrafts a month who passed on the overdraft protection service.
Fortunately, you don't have to rely on banks to solve your overdraft problems for you. Here are a few common-sense ways you can stop overdrawing your checking account and save a bundle on fees.
Strategy 1: The No-Tech Method
For many people, tricking yourself about money is the best way not to overspend. That's why one simple thing you can do is to put some extra money in your checking account, but don't list it in your checkbook (if you still track your money this way) and do your best to forget it's there.
This simple method might sound silly, but it can actually work to get you out of checking-account binds.
With cash, many people keep a spare $20 bill tucked in a special place in their wallet to bail them out when they're otherwise out of cash. The same strategy can help with checking accounts, both in keeping your balance above zero as well as maintaining any minimum balance necessary to avoid low-balance fees.
Whether it's $50 or $500, keeping some extra money in your checking can mean the difference between bouncing a check or getting through a financial emergency unscathed.
Strategy 2: The More-Tech Method
Online banking has made it easy to track your spending, but what many people don't know is that some online banking systems can give you valuable advance notice of an overdraft.
Some banks offer a look at pending transactions for a given day, so by checking your account in the morning, you can see whether an already-posted withdrawal will overdraw your account -- and even better, you can take steps to fix it before it even happens.
If you have an overdraft pending, the key is to get money transferred into your checking account before the end of the same day. If you have a savings account at the same bank, transferring money online is often the easiest way to get the job done. If not, though, going to a physical bank branch with money to deposit can save you a costly fee down the road.
Note, though, that not all banks allow this strategy. The CFPB report noted that banks use different methods to calculate available funds, process transactions, and put withdrawals and deposits in order. Check with your bank to find out which methods it uses, and then plot your plan of attack accordingly.
Strategy 3: The Credit Card Method (For Advanced Users Only)
For people who have trouble with spending, using credit cards instead of checks can be a dangerous solution that can create more problems. But the benefit of credit cards is that you only have to worry about writing a single check every month. Moreover, with online services available for credit card accounts, it's just as easy to track your spending with a credit card as it is with a checking account.
One way to get the benefits of a credit card while maintaining spending discipline is to further track your spending by entering credit-card transactions in your checkbook. The resulting checkbook balance figure won't reflect the actual money in your checking account, but it can make it easier for you to keep your spending under control.
The worst thing about paying overdraft fees is that it's completely unnecessary. By taking these simple steps, you can work to make overdrawing your account a thing of the past.
Why Your Bank Thinks Someone Stole Your Credit Card
3 Easy Ways to Avoid Overdraft Fees
One reason why Marquis' gas purchases might have triggered a fraud lockdown? Filling their tank is a common first move for credit card thieves.
"Some of the things they look at are small-dollar transactions at gas stations, followed by an attempt to make a larger purchase," explains Adam Levin of Identity Theft 911.
The idea is that thieves want to confirm that the card actually works before going on a buying spree, so they'll make a small purchase that wouldn't catch the attention of the cardholder. Popular methods include buying gas or making a small donation to charity, so banks have started scrutinizing those transactions.
Of course, it's not a simple matter of buying gas or giving to charity -- if those tasks triggered alerts constantly, no one would do either with a credit card. But Levin points to another possible explanation: Purchases made in a high-crime area are going to be held to a higher standard by the bank.
"It's almost a form of redlining," he says. "If there are certain [neighborhoods] where they've experienced an enormous amount of fraud, then anytime they see a transaction in the neighborhood, it sends an alert."
(Indeed, Erin tells me that one of the gas purchases that triggered an alert took place in a rough part of Detroit, which she visited specifically for the cheap gas.)
People who steal credit cards and credit card numbers usually aren't doing it so they can outfit their home with electronics and appliances. They don't want the actual products they're fraudulently buying; they're just in it to make money. So banks are always on the lookout for purchases of items that can easily be re-sold.
"Anytime a product can be turned around quickly for cash value, those are going to be the items that you would probably assume that, if you were a thief, you would want to get to first," says Karisse Hendrick of the Merchant Risk Council, which helps online merchants cut down on fraud. Levin says electronics are common choices for fraudsters, as are precious metals and jewelry.
Many thieves don't want to go through the rigmarole of buying laptops and jewelry, then selling them online or at pawnshops. They'd much prefer to just turn your stolen card directly into cold, hard cash.
There are a few ways that they can do that, and all of them will raise red flags at your bank or credit union. Using a credit card to buy a pricey gift card or load a bunch of money on a prepaid debit card is a fast way to attract the suspicions of your credit card issuer. Levin adds that some identity thieves also use stolen or cloned credit cards to buy chips at a casino, which they can then cash out (or, if they're feeling lucky, gamble away).
When assessing whether a purchase might be fraudulent, banks aren't just looking at what you bought and where you bought it. They're also asking if it's something you usually buy.
"The issuers know the buying patterns of a cardholder," says Hendrick. "They know the typical dollar amount of transaction and the type of purchase they put on a credit card."
Your bank sees a fairly high percentage of your purchases, so it knows if one is out of character for you. A thrifty individual who suddenly drops $500 on designer clothes should expect to get a call -- or have to make one when the bank flags the transaction. If you rarely travel and your card is suddenly used to purchase a flight to Europe, that's going to raise some red flags.
Speaking of Europe, the other big factor in banks' risk equations is whether you're making a purchase in a new area. I bought a computer just days after moving from Boston to New York, and had to confirm to the bank that I was indeed trying to make the purchase. Levin likewise says that making purchases in two different cities over a short period of time raises suspicions.
"I go from New York to California a lot, and invariably someone will call me [from the bank], " he says. Since one person can't go shopping in New York and California at the same time, any time a bank sees multiple purchases in multiple locations in a short period, it's going to be suspicious.