A world without overdraft

By Blake Ellis, staff reporter


NEW YORK (CNNMoney.com) -- Say goodbye to those nasty surprise overdraft fees.

Federal Reserve rules that took effect on Sun., Aug. 15, prevent banks from automatically enrolling customers in overdraft protection when making debit purchases or withdrawing money from ATMs.

While banks worried about losing revenue have been aggressively promoting "opt-in" overdraft plans, many customers are choosing to risk having their card declined rather than face a $35 overdraft fee.

But being unable to pay for your purchases can not only be embarrassing, it can sometimes deprive you of basic needs.

There are several ways to avoid getting declined. The simplest one: Don't overdraft your account in the first place.

But that's easier said than done in today's world of electronic banking. With direct deposit, debit cards, check writing and automatic payment plans for monthly bills, keeping track of your balance is harder than ever.

"The best thing you can do is focus on the available balance rather than the overall balance," said Greg McBride, a senior financial analyst at Bankrate.com. "But even then not everything clears at the same time so you've got to try to keep track of your transactions on your own to be safe."

So if you're not entirely certain how much money you have available, how can you avoid getting turned away at the cash register?

A linked savings account: Linking your checking and savings accounts is one of the safest ways to avoid overdraft fees.

If you try to make a purchase and don't have enough money in your checking account, the bank will tap your savings account to make up the difference.

The catch: You'll need at least some extra cash to open a savings account, and some banks have minimum requirements. And the bank will still charge you for the privilege. Each time you dip into the linked account, you'll see a fee of about $10. And linking it to your checking account can make it tempting to tap your savings when you shouldn't, said Gerri Detweiler, personal finance advisor at Credit.com.

"It's a good idea to have another savings account -- maybe online or across town -- that's completely separate from your checking account so that you have money somewhere that you really can't touch."

A line of credit: While a line of credit is similar to overdraft protection -- your bank extends you a small loan to cover any purchases made against insufficient funds -- it's a lot cheaper.

You'll still be charged for the service, but it's usually at a rate comparable to the interest rate on a credit card. Some banks also charge small fees for using the credit line.

"It certainly could be cheaper to open a line of credit with a bank even if you have to pay a small fee and interest," said Detweiler. "With overdraft protection, if you bounce a check it ends up costing you $25 a pop or more, and that adds up, so having this service could definitely be a better alternative."

Credit lines typically range between $500 and $2,000. To apply for one, all you have to do is ask your bank.

The catch: Not everyone can get one. They usually involve a credit check, so if you have poor credit, you're likely to be turned down, said Detweiler.

A cash cushion: Keeping extra cash in your account might be a no-brainer, but the real problem is avoiding the temptation to spend it. Detweiler recommends starting small.

Keeping, say, a $100 buffer in your checking account will help you deal with everyday expenses and unplanned costs, but it's not so much that you'd be tempted to use it, said Detweiler.

The catch: You'll need at least some extra cash.

A card-free life: Not only does using cash help you track your spending, but making regular withdrawals from the ATM forces you to keep tabs on how much is in your account.

Also, a strictly cash diet can teach you to budget, live within your means and start saving, said Detweiler.

"There's been a large move away from cash purchases in recent years because it's not as convenient and people don't want to carry a lot of cash with them or pay ATM fees," said Detweiler. "But it can be a really good budgeting tool if you use the good old envelope trick and designate envelopes for certain expenses each month."

The catch: Watch out for those ATM fees. To top of page

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