In the past, banks could automatically enroll their customers into overdraft protection plans for checking accounts. The protection plans typically allowed checks and debit card transactions to go through even if you’ve spent all of the money in your bank account. If you overdrew your account, you would simply be charged an additional $25 to $35 per item overdrawn. As of August 15th, the Federal Reserve created new rules which require banking customers to “opt-in” (agree) to overdraft protection. If you don’t opt-in for the protection, your debit card will be declined if you spend more than what’s available in your checking account.
Many customers have chosen to keep overdraft protection on their checking accounts, despite the hefty overdraft fees for each transaction that may go over their available balance. For some, it happens so infrequently that the protection just saves them from a potentially embarrassing mistake where their card is declined in the store. For others, they rely on the ability to overdraw their account just to make it through until the next payday and the $30 overdraft fee is well worth that convenience.
If you’ve declined overdraft protection, or you’ve chosen to keep it – you have options. Here are some tips from a financial expert for not using overdraft protection and spending so much money in overdraft fees.
Connect Your Savings to Your Checking Account
Some banks will allow you to connect your savings account to your checking account. If you accidentally write checks or swipe your debit card for more money than you have available, the bank can pull money to cover your transactions from your savings account instead of charging overdraft fees.
Most banks do charge for this service. The average rate is around $10 each time the bank has to move money from your savings account to your checking account – but it is still less than paying overdraft fees. Ideally, you’ll keep a close eye on your account balances though, and when you notice your checking account is getting close to being overdrawn, you can make a transfer from your savings account to your checking account yourself – without paying any fees.
Get a Line of Credit
A line of credit is a revolving ‘loan’ attached to your checking account. It’s similar to overdraft protection in that the bank will pull from your line of credit to cover any purchases you make that go over your available checking account balance, but there is no overdraft fee associated with each transaction that gets overdrawn. Instead of overdraft fees, you’ll pay interest on the amount of money you borrow from your line of credit.
Create Your “Own” Line of Credit
If you aren’t eligible for a line of credit through your bank due to credit reasons or because your bank doesn’t offer it, you can always create your own “line of credit”. Deposit extra money in your checking account, but don’t include it as part of your balance on your check register. If you overdraw your account, the money will be there to cover it. No interest charges and no overdraft fees! Keeping about $200 extra in your account should cover most accidental overdrafts, but remember if you do end up dipping into this reserve, you’ll want to replace it so that it’s available for the next time.