In the galaxy of annoying fees, overdraft charges are among the most irritating-and hardest to avoid. A study by the Federal Deposit Insurance Corp. found that three-fourths of banks automatically enrolled customers in overdraft programs and then charged as much as $38 each time they goofed. All told, overdraft fees provided $37 billion in revenue to banks in 2008, according to economic-research firm Moebs Services.
The Federal Reserve Board has been considering regulating overdraft protection for several years and expects to publish new rules by the end of the year. The regulations will require that banks either ask your permission to enroll you in an overdraft program or let you opt out. And bills before Congress would require not only that banks get permission to enroll you, but also that they provide clear disclosure of all fees and charges (including the annual percentage rate you pay when the bank covers a bounced check).
Consumer outrage and the possibility of congressional action have propelled some of the megabanks to modify their overdraft policies and programs to make them more consumer-friendly. Bank of America, Chase, City National Bank, PNC, U.S. Bank, Wachovia and Wells Fargo recently announced changes, such as lowering their overdraft fee, waiving the fee if you overdraw your account by $5 or $10 or less, and limiting the number of times you can be charged an overdraft fee in a single day.
Plus, some banks that previously let ATM and debit-card transactions go through even though customers did not have the funds to cover them -- and then charged an overdraft fee -- will now decline those transactions. (Some of these modifications are effective immediately; others are scheduled to take effect in October or the first quarter of 2010.)
Still, there are some steps you can take to beat the fees altogether.
• Bank at a credit union or small bank. "Credit unions have the lowest fees and require the lowest balances," says Ed Mierzwinski, of consumer-advocacy group US PIRG. And small community banks make it easier to decline overdraft protection. If your bank doesn't let you opt out, find one that does.
• Link to another account. Link your checking account to a savings account or credit line. Megabanks such as Bank of America, Citibank and JPMorgan Chase have upped their charge for each transfer to $10. But nearly half of the banks in the FDIC study charged no fees for transfers from linked accounts, and the median fee was a modest $5. (Some banks charge an annual fee of, say, $20 instead of a fee for each transfer.) You'll pay an average of 18% interest with a line of credit that you can tap when your checking account runs low.
• Set up two accounts. Link one checking account to a line of credit or savings account and use it to pay your mortgage and other important bills, recommends Michael Moebs, of Moebs Services. Use the second account for small items that you pay for with a debit card, but do not link it to a savings account or line of credit. That way, Moebs says, you can be sure you won't pay a $33 overdraft fee on a $4 latte.