Photo (cc) by B Rosen
According to recent reports, roughly half of Americans last August chose to decline the automatic “courtesy” overdraft protection offered by their banks. That was the service that paid a transaction, but charged a fee – typically around $30 – resulting in big fees for sometimes tiny purchases. (Here’s our story about the new overdraft rules.)
While most consumer advocates (including us) applaud the decision to decline courtesy overdraft, it’s one that’s left millions of Americans walking around with no protection at all. If you’re not carrying a sufficient bank balance, you’ll avoid an overdraft fee – but the price you’ll pay is finding yourself in the inconvenient and embarrassing position of having your debit card rejected. What’s a consumer to do? Here are 5 ideas:
- Carry cash. It never gets rejected. In addition, there’s at least two more advantages to cash. First, you may need it anyway – part of the recent financial reform law allows stores for the first time to set minimum purchase requirements for credit cards, and more and more are. If you want to spend less than $10 on a transaction – say for chips and a soda, or a latte – cash may become your only option. Another advantage of carrying cash? You’re likely to be more stingy with real money than plastic: here’s a story we did that offers evidence.
- Check your balance online. Most banks now allow you to check your balance with your smart phone – many will even send you an email or text message when your balance declines to a pre-determined level. There’s no excuse for ever overdrawing your account when you can check your balance instantly from anywhere.
- Balance your checking account. Bank research firm Moebs says an unbelievable 87 percent of people don’t. Knowing what you have in the bank is the single best way to avoid overdrawing your account, and reconciling your balance with the bank’s is the only sure way of knowing what you have. Plus, the new rules for declining courtesy overdraft don’t apply to checks – only to debit card and ATM withdrawals. As the FDIC notes, “These new limitations only apply to one-time debit card transactions and ATM withdrawals. Your bank may cover an overdraft that occurs by check or automatic payment (such as for your mortgage, insurance premiums or health-club membership) without you opting in for overdraft coverage, and it is likely to charge you a fee for doing so.” And even if your bank doesn’t cover it, retailers will fine you more than ever for bounced checks: up to 20 percent more than last year, according to Moebs.
- Get real overdraft protection. The “courtesy” overdraft protection that banks formerly put on every customer’s account without their advance approval was designed to generate fee income. Real overdraft protection is having money automatically transferred from a savings account or credit line should your checking balance fall below a certain level. Depending on where you bank, transfers may cost money – or, in the case of a credit line, interest – but it should be cheaper than the courtesy overdraft.
- Carry a credit card as a back-up. If you’re going to ignore the advice above, at least carry a back-up in the form of a credit card. There are many sites that can help you compare cards to find the best deal, including this one.
Be sure to check out the FDIC’s consumer news for more advice – they’ve got plenty of suggestions for dodging overdrafts and fees.