The Atlanta Journal-Constitution reported today that overdraft fees charged by banks in 2006 increased by 70% over 2005 from $10.3 billion to $17.5 billion (yes, that is billion with a “B”).
Two things are driving this huge increase. First, the federal Check 21 law put into effect a few years ago allows banks to process checks much faster than what consumers have grown accustomed to over the years. In effect, the “float” that once gave bank holders a few days to cover their checks has been dramatically reduced. Second, banks are now allowing their customers to overdraw their account with ATM and debit card purchases rather than declining the transactions. This is in conjunction with increasing debit card use.
What frustrates me about this story is that every penny of the $17.5 billion could easily be avoided by checking account holders with a minimum amount of effort.
Of course, we could all be more diligent about keeping track of our bank balances. But that is more work than anyone wants to do, even a financial person like me that gets excited about debits and credits.
Almost every bank will allow you to link your checking account to either a savings account or a home equity line of credit (HELOC) at no cost. If your bank does not, you should change to one that does. Then you are on autopilot and never have to worry about a $32 NSF fee again and you also don’t have to check into your account every few days to make sure you aren’t going to be overdrawn. Online banking now allows for so many ways to automate your finances to both avoid fees like this and to save or invest regularly before you spend the money elsewhere.
There is a second benefit to this approach. Your checking account may pay interest on your balance, but it is minuscule at best (likely less than 1%). Therefore, you should try to keep as little cash as possible in your checking account and either keep cash in your savings account or reduce your HELOC balance if you have debt. If you do have a HELOC balance, the rate is probably twice what you would earn in your savings account so it is likely the best place to put short-term cash.
Savings account are now paying in excess of 5% interest. You can easily earn a few hundred bucks a year in interest just keeping your cash in savings versus your checking and letting your checking account pull down the balance as needed. Just make sure your bank does not have a limit on the number of automatic transfers in a given period of time.
NSF’s are enough to make me vomit! If you live tight and one person has the check book, the other the debit card, one “extra” transaction can really mess you up-I know. But I think NSF’s are reaaly inexcusable these days for all the reasons you stated above.