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.
Overdraft Protection Is Not the Answer
Given the incentive for banks to keep collecting fees, you can't count on products like overdraft protection to save you money.
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.