It can be hard to track how much (or little) money you have in a savings or checking account, especially when you make frequent cash withdrawals or debit card purchases. For this reason, evil banks (which is all of them) institute outrageous fees, often charging you $25-$35 per overdraft transaction. I’ve heard horror stories where banks have arranged the order in which a day’s worth of transactions occurred to maximize fees. You could charge $5, $15 and then $40 in one day with a beginning balance of $35, and the bank would structure it so that instead of paying one fee (the $40 when you have $20 left after the first two transactions), FIRST they count the $40, triggering an overdraft fee, then two more fees for the $5 and $15 transactions! Pure. Evil.
While you can (and should) always call to reverse these charges, wouldn’t it be better to have them never occur in the first place?
Fortunately, there’s a very simple and painless way to accomplish this. Just pick up the phone and call your bank’s customer service number on the back of your ATM/debit card (have your account number(s) handy.) Ask them to make it so that your accounts can never be overdrawn when you use your ATM/Debit/Check card (writing checks will still allow others to overdraw your account, which is good because you don’t want checks to bounce!) Checks will bounce if they overdraw your account, and they are potentially a few other issues (see my confirmation letter below from my bank for details.) They’ll fill out a form and send it in on your behalf. Once that goes into effect, you will be unable to overdraw your account. I recommend also asking them 1) how long it will take to go into effect and 2) to notify you with a confirmation letter or email when it does.
This will make it so that if you don’t have the money, your ATM or debit transaction will be denied until you put more cash into your account. This is the simplest and best way that I know of to protect yourself from these obnoxious fees. I called Bank of America to have them do this for me and it took about 10 minutes, so make the call as soon as possible and never worry about overdraft penalties again.
[For those of you trying to eliminate credit card debt by switching to cash/debit card-only shopping, this is a vital step in helping you succeed by forcing you within certain cash limits while avoiding pesky fees. (Scroll down to page 40 of Ramit Sethi’s book here for more on how to get rid of your credit card debt.)]
UPDATE: Here’s a copy of the confirmation letter that Bank of America sent me when I eliminated my overdraft fees. They lied to me (likely out of incompetence, not malice) and told me my checks would still go through instead of bounce. This is apparenlty NOT true. Thus, I recommend keeping your ATM/debit card account separate from your checking account. (Or switch all your payments to electronic or cash like I do.)
I incurred some overdraft fees when I was home for the holidays. I don’t have a credit card in the US anymore, so I was using my Bank of America debit for everything. I had more than enough money in my savings and checking combined to pay for things, but I forgot to transfer more money into my checking account, and one day I overdrew my account on two separate purchases: one that made the balance -$7, and another that took it to around -$10. I luckily checked my account the next day and saw that I had overdrawn, so I transferred more money into my checking right away. Nothing happened for 2-3, and then suddenly they hit me with TWO $35 overdraft fees, one for each purchase, for a total of $70!!! I called the bank and told them my story and they agreed to reverse it, and then I thought to ask if there was any way they could make it impossible for me to overdraw my account again. As you said Ward, they set up everything for me in about 10 minutes. That should be the default setting, really.
One word of warning: apparently not all purchases immediately authorize your card for the full amount of money. When you buy gas, for example, most places only charge your card $1 initially, and then charge for the full amount later. So if you only have $1 in your account, you’ll still be allowed to buy a full tank of gas, and then later when the full charge comes through you will be penalized! So be wary of that. Apparently this can also happen with hotels and car rentals and such, but with most day-to-day purchases, the no-overdraw option should protect you.