Avoiding overdraft fees

I still recoil every time I think about my first experience with overdrawing my checking account.

It goes back to college days, and my parents made me responsible for keeping my checking and savings accounts balanced and up to date. That worked well for a while, but then I either got careless or was about broke — or both.

I remember writing several checks on purchases that overdrew my account, but the checks cleared anyway because I had overdraft protection. It meant I also was charged about $15 a pop for each overdraft, and worse, I had to explain to my parents why I had to transfer more money from my savings to checking to bring my account out of a negative balance.

That hurt. Although the overdraft protection bailed me out, I basically had handed over about $45 to the bank to cover my mistakes. I certainly had buyer’s remorse after that episode, but it also was a wake-up call to get a better handle on my checking-account balance.

The simple solution? Keep my account balanced. Not that a math error doesn’t crop up now and then, but I’ve not had to pay for overdraft protection, either.

Times haven’t changed much with college students and their overdraft experiences.

Separate studies by the NerdWallet personal finance website and the federal Consumer Financial Protection Bureau noted that college students and other young consumers are especially prone to overdrawing their checking accounts and racking up overdraft protection fees. No huge surprise — college kids lack experience and often draw down their checking close to the edge.

The two reports analyzed overdraft fees, bank policies and how consumers can avoid these problems in the first place.

NerdWallet reported that the average college student — who is typically not flush with cash — went into the red 2.2 times a year, compared with 2.07 times for the average American. Those students paid their bank $35 per overdraft, which is the median fee at large banks in the U.S., NerdWallet said. That’s about $70 a year in overdraft fees.

How does overdraft protection work?

In general, bank overdraft protection allows a transaction to go through even if you don’t have enough money in your checking account to cover it. However, you are charged a fee every time for this convenience.

Since 2010, banks have been required to ask consumers to opt into this service on debit purchases and overdrafts at ATMs. If you opt out, your purchase will simply be denied and you won’t incur fees. No harm, no foul.

However, understand that you still incur overdraft fees on checks and for online and automatic bill-payment services when you overdraw your account.

People who frequently overdraw their account typically pay about $450 in fees annually if they opted in to debit-card and ATM overdraft protection, according to the Consumer Financial Protection Bureau report. Those most frequently in trouble have low incomes and are young.

The frequent users of overdraft service opted in for protection 22 times a year, the watchdog agency said. Ka-ching.

Just as important as the fees, credit histories can be damaged.

Financial institutions have been criticized for not making their overdraft policy information clear, and the consumer agency is currently testing four one-page model forms to help people make better choices on opting in or out.

How can young, inexperienced consumers avoid overdraft fees? One commonsense guideline: Do as I did: Balance your checkbook regularly, and learn to manage money better. Electronic banking makes it even easier to monitor checking-account transactions on the spot.

In addition, most banks allow consumers to sign up for text or email alerts when their checking account is low. That way, they can avoid incurring overdraft fees by adding to their account, using another account or just skipping the purchase. Several online personal-finance apps, such as The Mint, alert consumers when bills are due and their account balance is low.

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