How to avoid getting punched by checking account overdraft fees

Would you want to pull out your debit card when you pick up lunch — or maybe even a prescription — and have it declined if you didn't have enough money in the account? 

After all, you would avoid being dinged by a $30 or $35 overdraft fee if the bank just said no dice right on the spot. Maybe you'd have enough cash in your pocket — or another piece of plastic, such as a credit card — to cover the purchase anyway. 

It's one strategy to take on those pesky overdraft fees.

Complaints continue to mount over the strings of overdraft fees and the mysterious mind-numbing methods that banks use to process transactions and ultimately push some people into incurring even more fees. It's because of overdraft rules that can be all over the map at different financial institutions.

Things are so bad that two Senate Democrats want to ban overdraft fees on debit card transactions and ATM withdrawals. 

Consumers — many of whom are college-age or live on a shaky financial footing  — handed over $11.45 billion in overdraft and other fees in 2017 to the country's biggest banks after checking accounts came up short, according to data released by the Federal Deposit Insurance Corp.

That's up by roughly $10 million from 2016. The FDIC has been collecting and releasing this data from banks that have $1 billion or more in assets since 2015. 

We're looking at yet more proof that a $30 or $35 fee isn't exactly chump change.

"Banks set up systems at every turn where they can maximize their revenue based on the behavior of consumers," said Peter Smith, senior researcher for the Center for Responsible Lending. "They've found a way to turn mistakes into a revenue source." 

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Overdraft profiteering by banks

The Center for Responsible Lending — which released a report on overdraft fees on Tuesday — concluded that consumers can still get caught at some banks by extra fees, known as sustained or extended overdraft fees, on top of a regular overdraft fee, if the money isn't added to the account to cover the balance shortfall in a week or so. 

In addition, some banks will allow four, five or even six overdraft fees to be charged per day to individual customers. 

Because of all the moving parts relating to electronic processing, it's more iffy than some realize to try to predict when checks will clear and the money actually will hit or leave your account. 

Sometimes, consumers get surprised, run out of money — and get hit with overdraft fees — because they forget about previously scheduled electronic payments that haven't yet hit the account. 

The latest attempt to crack down on overdraft fees involves proposed legislation called the Stop Overdraft Profiteering Act of 2018.  

The bill — introduced by U.S. Senators Cory Booker, D-New Jersey, and Sherrod Brown, D-Ohio — would do the following:

• Prohibit overdraft fees on debit card transactions and ATM withdrawals. Such a rule, of course, would essentially drive many banks to deny a transaction at the register or ATM if you didn't have enough money in the account to cover it. 
• Stop a bank from charging you more than one overdraft fee per month. And you couldn't be charged more than six overdraft fees in a calendar year for overdrafts relating to checks and recurring bill payments. 
• Limit overdraft fees associated with check and recurring bill payments. Fees would need to be "reasonable and proportional to the financial institution's costs in providing the overdraft coverage." 
• Mandate that banks post transactions  — deposits and withdrawals — in a way that minimizes overdraft fees. 

The financial risks are significant if you pull out a debit card, make an ATM withdrawal, have an electronic bill payment or write a paper check when there's not enough money in the account to cover the transaction.

If you're heading off to college — or trying to juggle bills on a limited income — here are ways to keep a lid on all those overdraft fees:

Some rules can be stacked against you

Most banks do not post the smallest payments first and then cover the biggest payments, which would lead to a lower number of overdraft charges, according to research by the Center for Responsible Lending.

Instead, some banks may process electronic payments first and then the biggest checks you've written, such as the rent, to the smallest checks, such as the babysitter.

If you're running a very tight budget, you can get in a lot of trouble with small debit card charges — even if it appears that you have enough money online to cover the purchase. Much can depend on how the institution treats the available balance vs. the actual balance. 

Some can help, if you're not talked out of them

Under federal regulations that went into effect in 2010, banks cannot charge overdraft fees for debit purchases and ATM withdrawals without a consumer's earlier consent or without an "opt-in."

If you're worried about triggering too many overdraft fees with a debit card purchase, don't "opt-in." Confused? Sure.

By not opting in, your debit purchase or ATM withdrawal would be declined on the spot if you didn't have enough money in the account. 

The reality is that things get even more confusing when you're asked if you want to opt in when a bunch of paperwork is shoved at you when you're opening a checking account. It can be overwhelming for many young consumers.

Many consumers talk with a bank representative and then end up being convinced to opt in when opening a checking account because they think it's the right thing to do. Some consumers might not want to be embarrassed by being turned down for a purchase if their account is running a tad short. 

The Stop Overdraft Profiteering Act would mandate a three-day waiting period between when an individual opens a new account and when the financial institution may offer overdraft protection. 

Keep an eye out for fees that can be charged on top of fees 

The Center for Responsible Lending study on Tuesday showed that five of 10 major banks, for example, charge some sort of sustained or extended overdraft fee, which is added onto overdraft fees in some cases. They include: Chase, U.S. Bank, PNC Bank, BB&T and SunTrust. 

Chase will charge a $15 fee each time your account is overdrawn for five consecutive business days. That extended overdraft fee applies even if your account is overdrawn by $5 or less. 

On the plus side, Chase will not charge a $34 overdraft fee if your account is overdrawn by $5 or less at the end of each business day or if a transaction of $5 or less resulted in an overdraft. 

PNC Bank — which has a $36 overdraft fee — also would charge $7 per day if your account remains overdrawn for five or more consecutive calendar days — up to a maximum of $98 in addition to any other fees assessed, according to disclosures for its Virtual Wallet product. 

The sustained or extended fee is $36 at some banks, including U.S. Bank, BB&T, and SunTrust, according to the Center for Responsible Lending's report.

U.S. Bank -- which has a separate $36 overdraft fee -- notes that its extended overdraft fee is a one-time $36 charge that could hit on the eighth calendar or next business day as applicable -- if the negative balance isn't corrected earlier. 

Rules vary on overdraft fees with a debit card or ATM

Not all banks are doing things the same way when it comes to debit cards. 

Bank of America declines debit card transactions at the point of sale if there's not enough money in the account to cover the purchase. At the ATM, though, Bank of America alerts customers multiple times that the transaction might cause an overdraft and result in a fee.

BB&T notes that it allows customers to stop an ATM transaction if it appears they will overdraw the account, too. A message pops up during the transaction asking the customer if they want to continue.

Bank of America — which has an overdraft fee of $35 — won't charge a fee for an overdraft when purchases are less than $1 and won't charge a fee for overdraft amounts under $1. 

Some strategies can save you money but not always "free checking"

"Free checking is often subsidized by very aggressive overdraft practices," warned Smith, the researcher for the Center for Responsible Lending.

If you open a checking account because there is no monthly fee, make sure to understand the overdraft rules, too.

Some banks, like Chase, are offering a $300 bonus to get you to open a checking account and set up direct deposit. But again, understand all the overdraft fees and rules before you jump at any promotions. 

Of course, there are some easy hacks that consumers use to avoid overdraft fees. 

Sign up for mobile alerts if your account hits below a set amount. 

Some charge certain set bills to a credit card and then write one check to cover the credit card bill each month. That can help avoid some risks if you don't balance your checkbook. 

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Sometimes, you can get a fee waived, if you've been a good customer in the past. 

Some consumers have had success by linking a checking account to a savings account or another account. The bank or credit union then would take money from the other account if you run out of money in checking. You'd still be charged a fee but it's likely to be lower than an overdraft fee.

PNC's Virtual Wallet, for example, automatically links a customer’s account to another checking and savings account for overdraft protection. 

Some consumers keep an extra couple of hundred dollars in a checking account as a cushion in case there's a mistake. But not everyone can afford to do that.

"If you have less money, overdrafts happen more and overdrafts mean more to you," Smith said. 

More than 43 million Americans use banks, thrifts, credit unions and payday lenders to cover shortfalls in their personal financial positions between paychecks, according to Michael Moebs, who runs his own economic research firm in Illinois. 

He said his analysis showed that average overdraft fees at a credit union hit $29 in 2017 — nearly doubling from $15 in 2000.

Moebs suggests that some younger consumers might want to try reloadable pre-paid cards to avoid spending more money than they have on hand. 

BB&T, for example, offers its MoneyAccount reloadable card. The account holder can only spend money that has been deposited. The monthly maintenance fee can be as low as $3 per month. BB&T customers can choose MoneyAccount as a standalone option or as a companion card with a checking account.

For many consumers, an overdraft fee can be a one-time headache. Only 8 percent of account holders pay nearly 80 percent of all the overdraft and non-sufficient-fund fees. Some can incur 10 or more overdraft fees in a year. 

Consumer watchdogs have been pushing for increased regulation for several years when it comes to overdrafts. But the regulatory environment in Washington today isn't likely to stop banks from collecting billions on overdraft fees. 

Contact Susan Tompor: stompor@freepress.com or 313-222-8876. Follow Susan on Twitter @Tompor