The New York Times has been providing some excellent insights into the tumultuous changes in the credit card and banking industry. Today’s edition has an article entitled “The Card Game: Overspending on Debit Cards Is a Boon for Banks” which delves into some issues that we discussed here at MYC in our post “Credit or  Debit? It’s Becoming Harder to Tell the Difference.” The article described debt as “stealth credit” and explored the possibility of legislation that would limit the ability of banks to charge overdraft fees or authorize transactions when an acocunt is overdrawn. With so much buzz, it seems like a Debit CARD Act may be on the horizon.

This increased media coverage of the pitfalls of debit cards highlights the confusion and frustration of card holders and consumers like us. Here we are defeating our credit card debt, reducing our borrowing by a record breaking $21.6 billion and switching to debit cards instead of wielding troublesome revolving credit accounts and the penalties and trickery tag along like stray puppies. Luckily, we can apply some of the savvy that we picked up from dealing with wily credit card issuers in order to deflect some of the check card chicanery afoot. Here are a few ways to head off overdraft fees at the pass:

Opt Out of Overdraft Protection

The simplest way to stop the fee madness is to simply opt-out. However, there are several problems with this. First of all, if you do overdraw and you don’t have the overdraft protection, you’ll incur bounced check or other merchant fees. Secondly, some banks simply won’t allow you to cancel your overdraft protection. Then there’s the obvious question: if you are responsible enough with your spending and keeping tabs on your account so that you don’t need overdraft protection, canceling it is moot either way, since you won’t be overdrawing and incurring fees in the first place. Of course, if you are running close to the red and using your card rather than writing checks, it may be worth the slight embarrassment to have your card denied rather than having a $37 fee tacked on to every purchase for that day simply because your deposits hadn’t cleared yet.

Link to a Savings Account

This used to be the most obvious and best method for protecting against both overdraft fees and merchant denials and bounces. If you link your savings account to your checking account, you can simply have a certain amount of money funneled into your would be delinquent account automatically. This would effectively prevent the first overdraft and any subsequent overdrafts for the rest of the day (provided that a little extra money got moved over, rather than just enough to cover your purchase). Now, though, banks are charging a fee to cover you with your own money. Still, the fee – which is typically in the $10 to $15 range – is a lot lower than an overdraft fee.

Overdraft Line of Credit

This newfangled service is perhaps the most cost-efficient way to nix overdraft fees – as long as you use it correctly. An overdraft line of credit is different from overdraft protection. Rather than charging you an upfront fee when you overdraw, your bank literally loans you money to cover your purchase. Unsurprisingly, this loan comes with a “competitive interest rate” but even 25% of a $4.40 purchase is starkly less than a $34 flat fee. An overdraft line of credit gives you time to get home and check out your balance and shuffle money around before interest accrues.

The danger of an overdraft line of credit is, of course, that it’s a credit – the very thing that you were trying to avoid by using a debit card. In a way, it is a case of swallowing the spider to catch the fly, but the overdraft line of credit is something that you should be using as a backup, not as a habit. Still, be advised that if you do have a credit card with the bank, your overdraft line of credit may be difficult to pay off. It may go on the books as a “cash advance” meaning there is no grace period and you’ll have to pay off your normal credit card balance before any of your payments apply to your overdraft line of credit balance. Also be aware that banks may do a hard pull on your credit history when you sign up for the line of credit. For example, ING Direct automatically signs you up for the overdraft line of credit protection and just goes ahead and does a credit inquiry when you open your account. This affects your credit score, but not by much.

Monitor Closely, Use a Cushion

Some banks allow you to setup alerts when your balance gets low. Using their online banking tools, you can have them send you a text or an e-mail when your checking account gets close to zero. Also, you can use personal finance suites such as Thrive and Mint to give you updates on your daily balances.

And then there’s the practice that you should be using anyway: have a cushion in your checking account. Stop spending right down to the single digits and don’t count on that check that you deposited on Friday to cover you on Monday. Try to keep a $1,000 buffer in your checking account and simply use cash or credit whenever you slip below your own threshold. This method is free and effective and may even help you rein in your spending.

The terrain of debit and credit card spending is astir with seismic activity. Make sure you don’t slip into the cracks as the banking industry figures out how to best turn a profit without alienating customers. By being extra diligent and careful, you can ensure that you don’t take the brunt of the fees and charges being levied to less wary consumers.

How about you? How do you ward off the fees from your debit card?

Photo by laverrue

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