6 ways to avoid overdraft fees

If you've ever had to pay overdraft fees or faced the embarrassment of having your debit card declined, there's help! Learn six ways to stay on top of your bank balance.

Ever been surprised by an overdraft fee? Now that banks are required to get their customers' permission to charge overdraft fees, many customers aren't taking the bait, choosing instead to have their card declined despite the potential for embarrassment.

Previously, banks would often automatically enroll customers in overdraft protection, which would kick in to cover the amount of cash overdrawn at the ATM or with a debit card transaction. Unfortunately, they would also charge a hefty fee for this.

Federal Reserve rules that took effect in August 2010 now prevent banks from automatically enrolling customers in overdraft protection. Many banks are promoting "opt-in" overdraft plans in place of automatic enrollment, and some customers are signing up.

In fact, a National Foundation for Credit Counseling (NFCC) online survey with 2,089 respondents found that 26 percent planned to opt in for overdraft protection even though they knew that an overdraft could cost them an average of $27.

But regardless of whether you've opted in to an overdraft program, nobody likes being caught short of funds at the restaurant or the checkout counter or paying for the proverbial $27 latte. What's the best way to stay out of overdraft trouble?

The no. 1 way to keep your bank card in good standing

You guessed it: don't overdraw your account.

That's simple enough, yet not always easy to practice. With today's rapidly growing technology, we have multiple ways to withdraw money from our savings and checking accounts -- checks, ATMs, electronic transfers, automatic bill pay and more. Often, our money is deposited through several methods too, such as direct deposit, cash, checks and transfers.

On top of this, with many household checking accounts shared by couples, there's the potential for miscommunication about whether a bill was paid or whether the grocery bill was higher this month -- a perfect storm that can lead to an overdrawn account.

6 tactics to avoid overdraft fees

Whether or not you plan to opt in to overdraft protection, use the following guidelines from the NFCC to avoid hefty overdraft fees or the embarrassment of being turned away at the cash register:

1. Use the available balance, and ignore the overall balance. For example, if a check hasn't been cleared by the issuing bank, the funds might appear as part of your overall balance, but they aren't yet available for you to spend. Instead focus on the available balance when making purchasing decisions.
2. Keep a check register. A check register records withdrawals and deposits from ATMs, debit cards and paper checks. But again, just be sure deposited checks have cleared before recording them as part of your available balance.
3. Use technology. If keeping a paper check register just isn't going to happen for you, sign up for e-mail or text alerts to notify you when your balance is low. You can do this through most banks, online with programs like Mint.com or on your smart phone with services like Pageonce.
4. Link to your savings account. One alternative to overdraft protection is to self-insure by linking your checking account to your high interest savings account. Should you overdraw, extra cash to cover the purchase is automatically taken from your savings. The caveat is that banks often charge a convenience fee, usually about $10 --but that's still much less than a regular overdraft fee. And take care of yourself and your savings account: it's not a good idea to link accounts if you're easily tempted to spend your savings.
5. Create a cash cushion. A zero-fee way to self-insure is to pad your checking account with a cash cushion to help you handle small expenses. As the NFCC report advises, "Most people spend a similar amount each month. If possible, keep an extra $100 in your checking account to cover unplanned expenses."
6. Work with your creditors. If you fall behind on payments because your due dates fall before your paydays, contact each creditor and ask for a due date change. If possible, arrange to have all bills due on just one or two days of the month, so they can be paid all at once. This can help prevent future cash shortages--no more having to pay for two months of electricity plus late fees because you misplaced the bill last month.

Finally, if you've racked up overdraft protection fees you can't afford, you might consider going card-free. Sticking to cash-only can help you track your spending, and hitting the ATM regularly allows you to keep tabs on how much cash is in your account. Plus, with cash in your pocket, you'll have no worries about being declined when buying your daily cup of coffee.

Even one overdraft fee once in a while can erase the gains from even the best savings rates. Whatever your method, it's smart and disciplined personal finance to stay out of overdraft trouble.

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