Earlier this summer, the (U.S.) government passed a law that requires you to opt-in before banks can charge you an overdraft fee. By opting-in, you agree that banks can process transactions that are over your account balance and you agree to pay the associated overdraft fee.
You can also opt-out, which means banks won’t process transactions that exceed your balance and therefore your account won’t get overdrawn. But, that also means that debit card transactions could be declined and checks will be returned for non-sufficient funds (leading to non-sufficient funds fees).
I understand why some people needed the law, but I pretty much ignored it because I don’t overdraft. I’m not perfect – I’ve overdrafted before, but it was more than a decade ago. Owing my bank $600 because of bounced checks and overdraft fees was enough to make me swear off overdraft fees forever.
Banks have confusing deposit rules and unfavorable transaction ordering processes that aren’t fair and don’t make sense. My $600 lesson taught me that there’s no use crying “No fair” when their rules don’t work in your favor.
If you want to keep from overdrafting, just spend cash and get money orders instead of writing checks. Just kidding! Here are some tips to keep you from overdrafting your account or having your transactions declined if you’ve opted-out.
What’s in your checking account isn’t necessarily what you’re able to spend. Your “real balance” may be reduced by outstanding checks or $1 debit card pre-authorizations. It’s a good idea to keep up with a check register that reflects your true checking account balance.
Deposits aren’t spendable until they actually show up in your account. This is the trick that caused me to overdraft by so much. Banks have confusing definitions about when money is going to show up in your account. For example, banks often process deposits overnight and make them available on the next business day. Sometimes a late Friday deposit may not be available until Tuesday. Cash deposits may show up the same day, but checks and direct deposits may take a day or two. That’s why I wait until the deposit actually clears and shows up online before I spend the money.
Always subtract scheduled bills from your current balance. I have two recurring payments that comes out of my account close to the end of the month (something I’ve been meaning to change). Since I pay myself monthly, I always have to consider these two transactions when I’m spending money.
Leave a buffer. You can almost ignore the other rules if you plan to leave a buffer in your account at all times. The size of your buffer depends on your income and spending habits. I try to leave about $100 to $200 in my account at all times, but you can adjust that number upwards if you think that will work better for you.
Link your checking account to a savings account. Many checking accounts offer overdraft protection where you can link your account to a savings account, line of credit, or credit card. I advise against overdrafting to a line of credit or credit card because you’re creating debt that has to be repaid and it’s not much better than paying an overdraft fee. If you link to a savings account, though, you don’t owe anyone for the overdraft. You can put the money back into the savings account at your leisure. Your bank might charge a fee for this service.
Your bank should have contacted you earlier this year to get your opt-out decision. If you didn’t respond, you were automatically opted-out, meaning your debit card transactions will be declined if you don’t have enough money to cover them. Checks will typically be processed twice and you’ll face a non-sufficient funds charge if you don’t have any money. Plus, the merchant may charge you a returned check fee.
You have to expressly opt-in if you’d rather pay the overdraft fee and you can opt-out at anytime. Overdraft and NSF fees can be as much as $35. Some banks add a fee each day your account balance remains negative. But you can avoid these fees and have enjoy a free checking account if you don't overspend your account.