Overdraft fees have earned a reputation of being an extremely expensive and very common bank fee.
According to economic research firm Moebs Services, banks generated $32 billion in revenue from overdraft fees in 2012, up from $31.6 billion in 2011. And those numbers are likely to rise as banks change their overdraft fee policies.
In August, U.S. Bank plans to impose a flat $36 overdraft fee – replacing a more consumer-friendly tiered fee policy. When your balance is close to $0, buying a cup of coffee that results in an overdraft fee of $36 is a hefty penalty for spending more than you have in your account.
More often than not, consumers don't incur just a single overdraft fee. Without any warning that you have insufficient funds, you can easily make multiple purchases and be shocked when you see hundreds of dollars in overdraft fees the next time you check your account.
You can avoid having this happen to you by implementing these preventative measures:
1. Opt out of overdraft coverage.
In 2010, a federal law took effect that required customer consent before a bank could process a non-recurring debit card or ATM transaction that resulted in an overdraft and, consequently, an overdraft charge. Note that the law does not cover checks and automatic bill payments, which may continue to be processed even if you end up with a negative account balance.
If you don't opt in, transactions will be declined when there isn't enough money in your account. It'll save you in the end though because you won't be charged any overdraft fees.
2. Maintain a buffer balance in your account.
A saver may find that having a large balance in a checking account is unwise because that money is better off in an account that earns interest (like savings and certificates of deposit) or has the potential to yield sizable returns (like brokerage and individual retirement accounts).
However, a buffer balance is important to prevent overdrafts. A decent buffer is equivalent to your total recurring monthly expenses, including rent, utilities, gas and food. Just be mindful of how much you spend.
3. Set up account alerts.
It is a tedious chore to ensure that there is always enough money in your checking account. Luckily, many banks offer various forms of account alerts to notify customers when something happens or if there are changes to their accounts.
You can set up email or text message alerts to let you know when your account balance falls below a specified amount. These account alerts are also available on many mobile banking applications.
You can also sign up for notifications when an overdraft occurs. When you're alerted to an overdraft, you may be able to deposit money in time to avoid the overdraft fees – most banks will waive all overdraft fees if you bring your account balance back to $0 or higher.
4. Use overdraft protection programs.
In certain situations and emergencies, you may know you are about to incur an overdraft fee but still want the transaction to be processed. Overdraft protection may come in handy in these cases.
Overdraft protection programs allow customers to link their checking accounts to a savings account or line of credit. When a transaction causes a negative balance, a bank will automatically perform an overdraft protection transfer from the linked account to cover the overdrawn amount. Note that banks may charge an overdraft protection transfer fee. With a line of credit, you're simply borrowing from this credit line and you'll be subject to interest charges, just like any other loan.
The bottom line: Overdraft protection programs do come with their own costs, but it's less than overdraft fees.
Simon Zhen is a columnist and staff writer for MyBankTracker.com, where he covers banking, financial technology and savings rates.