Tips on How to Avoid Abusive Overdraft Charges by Banks

A bank overdraft is simply what happens when you charge too much on your debit or checking account-linked credit card - or when you write too large of a check - such that the payable amount exceeds the available balance in your account. While some people may overdraft by hundreds of dollars, most overdrafts that occur on a daily basis all across the country are for $5-$50. In other words, most people don't miss by much.

Now, in the old days (over 10 years ago), if a bank detected a potential overdraft, they would simply deny the incoming charge. If a check was written, the bank would reject the check, sending it back to the issuing bank. At the same time, the bank my charge a fee for doing so.



Fast forward to today. Most banks have implemented something called overdraft protection. This is an opt-out service which one enrolls in with most new checking accounts. Of course, by opt-out, it means that you are actually automatically enrolled in the service unless you choose to opt out. Most people, of course, just remain enrolled. After all: what could be wrong with an overdraft protection program? It has the word "protection" in it, doesn't it?

Here's what is wrong with it: the only thing that is really protected is banks' profits. With overdraft protection, when you overdraw your account, your bank will cover the difference for the few days it takes for you to pay them back. But, they charge you $30 or $35 for this service, which if equated to an interest charge would run into 1,000% or more for most overdraft situations.

Here are some tips for how to avoid abusive overdraft charges by banks:

1. Strive to keep a bit of padding in your account at all time. The more, the better, but $50 or so should do the trick.

2. Set up a savings account with the same bank and link it to your checking account. This will allow you to cover your checking account overdraft with the money in your savings account.

3. Consider switching to another bank that does not charge overdraft fees. There are some banks that will never charge you an overdraft fee, even when you overdraw the account!

For more on this topic, also see: http://www.squidoo.com/how-to-avoid-abusive-overdraft-charges-by-banks.