How to Protect Yourself from Debit Card Overdrafts

Overdrafts are a common result of individuals who are either unorganized or simply too busy to keep track of their debit card use and other debits from their checking accounts. When this happens, too many debits are presented to a bank account which lacks sufficient funds to cover all transactions. Here we look at ways to prevent debit card overdrafts and whether or not overdraft protection is a good idea.

The easiest way to prevent debit card overdrafts is by paying close attention to all transactions posting to your checking account. This includes automated debits, checks, debit card transactions as well as all deposits to your account. The following tips will help you keep all of your transactions in order and prevent overdraft fees.

• Record keeping: If you haven’t already developed a healthy respect for good record keeping, you will once you have experienced overdraft fees. With each fee averaging around $35 or more, each transaction resulting in an overdraft will quickly cost you a bundle. It is imperative to keep all receipts from ATM withdrawals as well as debit card purchases to ensure all transactions are accurately noted. Checks should be recorded in the same manner and any deposits to the account whether manual or automated should be confirmed as well.
• Online access: All major banks and most of the smaller branches have some form of online access. If you find the thought of balancing your checkbook once a month a tedious and outdated concept, more frequent balancing with online access should be an option to consider. When you get in the habit of checking (and reconciling) your account weekly or even a few times a week, you can quickly spot transactions you may have forgotten about. This small change in how you balance your bank accounts could potentially save you hundreds of dollars if you catch an error before it results in overdraft fees. In addition, when you get in the habit of checking your account more frequently, it becomes less time consuming and fairly easy to reconcile the account.
• Pad your account: When you have a debit card purchase of $21.20, consider deducting $22 or even $25 from your check register. This will allow for a gradual “padding” of the account which may come in handy if you ever find yourself making a mistake which would otherwise result in an overdraft. This is similar to the “saving your change” concept many people have forgotten about in this day and age of electronic transactions.
• Link to savings: Another way to prevent overdrafts beyond managing your money better is to simply link your checking account to a savings account. When allowed by your bank, this would reduce overdrafts by taking money from your savings account to cover transactions that would otherwise result in an overdraft fee.

Overdraft Protection Plan, Opt-in or Opt-out?

Previously banks were allowed to automatically enroll account holders in an overdraft protection plan. What many individuals didn’t realize was overdraft protection plans do not necessarily prevent overdraft fees. In fact, in almost all cases, the only thing this type of plan allows is a transaction to take place that otherwise would have been denied or “returned for insufficient funds”. In doing so, an account holder can prevent additional overdraft fees, like those associated with a returned check. Unfortunately, the bank providing the overdraft protection will still charge a fee for this “protection”.

Consumers now have the choice to either opt-in for this protection or opt-out. Whether you should or should not opt for overdraft protection greatly depends on your personal money management habits. If you rarely overdraw your account and accurately track your money — this protection may be of little value to you. On the rare chance a debit it presented that would result in an overdraft, the one time fee may be worth the convenience. On the other hand, simply having the ability to overdraw your account may be tempting for individuals who struggle with money management. The end result in this case could be overdraft fees which compound one on top of each other, costing the account owner hundreds…perhaps even thousands of dollars over time.

When in doubt remember this; the best way to prevent overdrafts fees is by preventing overdrafts themselves.

Photo from Wikimedia Commons

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