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10 Tips for Avoiding Overdraft Fees

Bank of America is settling the overdraft fee class-action lawsuit that alleges the bank knowingly manipulated customers’ deposits and withdrawals in order to maximize the fees they would receive. Although the banks aren’t completely to blame for the proliferation of overdraft fees, policies were so much of a problem that the government and regulators needed to step in. As a result of new regulations brought on by the Credit CARD Act of 2009, banks now require customers to opt in for overdraft protection, which about 90 percent of customers do. Those who do not would suffer the embarrassment of a declined debit card or, perhaps worse, the expense of a bounced check.

While limited by new regulations, banks are constantly looking for ways to increase profits, and when they can’t earn money by lending out deposits as much as they have in the past, they turn to increasing fees. According to recent research, banks project earning $38.5 billion from overdraft fees alone in 2009, up from $24 billion in 2008. In 2010, profit from overdraft fees set a new record, but due to a variety of fiscal accounting years in the industry, I don’t have the number on hand yet. 90 percent of these fees come from only ten percent of customers, so it would be fair to say that it’s more common to see a serial offender than a one-time offender.

You may find that it has been more difficult for those one-time offenders to talk their way to a reversal of a fee through customer service. In times like these, when the banks want to protect their money as much as possible, it makes sense for consumers to avoid overdraft fees in the first place.

If you follow these suggestions, there should be no reason for you to be charged an overdraft fee unless you make a mistake.

Nickel and Dime1. Balance your checkbook. There is a disconnect between the checking account balance according to the bank and how much money you have to work with. If you have a traditional personal checking account, the bank doesn’t know when you write a check. It’s your responsibility to know how much money you have available at any one time. The best way to do this is to keep a register. Start with your opening balance, and subtract from it every time you write a check and add to it every time you make a deposit.

2. Don’t forget about your debit card. It gets difficult to balance your checkbook if you also use a debit card to get cash or to pay for purchases. When you sit down at your desk to write checks to pay your bills, all of your financial information is in front of you and you can easily enter the check amount in your register. But when you use a linked debit or ATM card, you need to hold onto your receipts so you can enter the transaction into your checkbook at a later time. If you remember.

3. Access your checking account online. Online banking is one of the greatest benefits of the internet. Rather than waiting for your monthly statement in the mail, you can log onto your bank’s website and check your recent transactions at any time. If nothing else, checking the bank’s records for your account more than once a month helps you become familiar with the transactions that flow through your account and how low you like to keep your balance.

4. Keep your balance well above the minimum. Some checking accounts charge a fee if your balance dips below a certain minimum, but almost all will charge a fee if that minimum is $0. Give yourself a buffer. If you withdraw an average of $2,000 each month for your mortgage and other bills, don’t let your bank account float below $2,000. This way, you always have a month’s worth of expenses ready to protect you from $0. Since checking accounts often offer lower interest rates than savings accounts, particularly high-yield savings accounts, you will be giving up a small amount of interest income, but the protection might be worthwhile.

5. Link your checking account to a savings account. Many banks offer the option of linking a checking account to a savings account. In the even that your checking account dips below $0 due to a cashed check for which you have insufficient funds or a charge on your debit card, the bank automatically transfers money from your savings account to cover the withdrawal. Some banks will charge a fee for this service, but the fee is often lower than an overdraft fee.

6. Link your checking account to a line of credit. If you have good credit, this is a legitimate option. Rather than withdrawing funds to cover your overdraft from a savings account, the bank taps your line of credit. You will owe interest on the amount you borrow from your credit line, and you may owe an annual fee for use of the credit line, but the total fees could be substantially lower than a typical overdraft fee.

7. Ask to remove overdraft protection. Banks believe overdraft protection, even for a fee, is a service customers want. In many cases, that is true. If you send your mortgage or rent payment, you might prefer the large check not to bounce. Bounced checks cause problems for the recipient and the sender; overdraft protection eliminates this hassle. If it is not likely that you will bounce a major payment, it might make sense to ask your bank to remove the overdraft protection feature for your account. Keep in mind that you will still be charged a “returned check” fee if you bounce a check.

8. Track your finances electronically. There are many tools now that let you connect directly to your bank’s databases to download and list your transactions automatically. My current favorite is the desktop version of Quicken, but even with its robustness, this type of software may be more than what is necessary for avoiding overdraft fees in a checking account. I suggest signing up for a free service like Mint to monitor all your financial accounts in one place.

9. Create reminders and notifications. Many banks continue to improve their technological offerings for checking accounts. I know of at least one bank that will, if you enable this feature, send you a text message if your bank account decreases to a balance you define. For example, you might receive a notice when a cashed check reduces your balance to $95, five dollars below your established warning minimum of $100. If your bank doesn’t offer this feature, one of your linked services will. Although I don’t use this service often, I receive an email from Mint when my Wachovia personal checking account balance dips below $2,000.

10. Look for free overdraft protection. Some credit unions offer checking accounts with free overdraft protection. You can start at the Credit Union National Association’s credit union finder.

Overdraft fees happen to the best of us because we are all human and make mistakes. The best thing we can do is reduce the occurrence of these fees to a point at which it will be much easier to talk with the bank when the mistakes do happen. Opening a line of communication can help, and if you maintain a good conversation with customer service representatives, you may be able to convince banks to make an occasional overdraft fee disappear.

This negotiation works best when you have a positive history with the bank. The more overdrafts you have on your record, the less likely the bank will be willing to forgive your fees. If you prove yourself to be a good customer, you have a better chance of being rewarded.

Published or updated August 30, 2011.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 12 comments… read them below or add one }

avatar 1 Anonymous

Good tips – I think that the best ways to keep overdraft fees down is to always know how much you’ve got in the bank! I love Mint for that. Also, ING Direct is great at letting you know how much you have and when your recurring payments will go into effect. I haven’t had a single overdraft yet – but I’m the type that checks his account several times a day.

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avatar 2 Anonymous

TBH, this was a rather lame post. When it comes right down to it, there is only one way to get an overdraft fee, and one way to avoid it. Don’t spend more money than you have in your account.

Please shoot for something with a little bit more depth — you’re pretty good at it otherwise.

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avatar 3 Luke Landes

I fully agree with you, Dan, and I appreciate the comment. What you’re saying is similar to the idea that there is only one way to get rich: spend less than you earn. You nailed the overall concept, but there is a big disconnect between knowing a concept and taking steps to ensure you make the best decisions in line with that concept.

The article may be a bit basic, but I know there are visitors to shizennougyou who enjoy or are looking for the basics.

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avatar 4 Anonymous

I think online banking is the most important tip. Your debit purchases are reflected there very quickly (under 2 hours for one I made today) and instead of writing a check, have your bank do it for you; it’s free and saves you the cost of a stamp/envelope, and it gets deducted right away.

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avatar 5 Anonymous

Our former editor – who used to write for the Wall Street Journal and now writes for NY Times – recommends avoiding overdraft protection – and at the very least doing your VERY best not to rely on it. Overdraft protection often results in some hefty fees. As you and Dan note – the best way to handle an account is to stay on top of what’s in it.

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avatar 6 Anonymous

Great post – very good advice!

My checking account recently imploded when my mortgage payment automatic draft was double charged accidently – like you said it can happen to the best of us – whew! that one was a mess!

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avatar 7 Anonymous

Notifications are a wonderful method for reminding you when you’ve crossed a financial threshold.

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avatar 8 Ceecee

I am amazed at how many people don’t balance their checkbooks every month. I have found bank mistakes on them. And it is the only way to know if an old check has never cleared. It is easy if you keep up with it every month, not so easy if you only do it a few times a year.

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avatar 9 shellye

Agreed. The #1 tip in this post is to balance your checkbook, but I think the debit card is sending checkbook balancing the way of the dinosaur. People just use their card and assume there is enough money in the account to cover the purchase. Then they call their financial institution and scream “how did this happen?” and “I want that fee refunded NOW!” only to learn that their account didn’t have enough money to cover the transaction in the first place. If they had at least checked their balance online before shopping, they would have avoided the problem.

I answer one of these phone calls at work at least once a day. But I’ll get off my soapbox now… :-)

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avatar 10 Anonymous

What happened to the old fashion way of doing everything online. There won’t be mistakes but I guess the new way is to use paper and a calculator?

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avatar 11 Anonymous

For very limited time, JPM Chase waived its overdraft fees, out-of-network ATM fees, early withdrawal fees on CDs, and late payment fees for customers in NH, ME, VT, MA, RI, CT, NY, NJ, DE, PA, MD, NC, and VA through Sunday September 4, 2011 due to Hurricane Irene. Wells Fargo said it waived out-of-network ATM fees and early withdrawal fees on CDs through Friday September 2; but only applies to customers in CT, NJ, and NY. News article said other banks including Bank of America, Capital One, Citibank, PNC, and HSBC would waive fees, credit card late payment fees, lower APR, and make payment plan changes on a case-by-case basis for customers facing hard times with Hurricane Irene or floodings; but, they must contact their local branch for requesting fee waivers and account adjustments.

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avatar 12 Anonymous

Point one is probably the most important point. If you keep your checkbook balanced it’s going to be hard for you to be charged overdraft fees.

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