Thursday, July 14, 2005

Protect yourself from Overdraft Charges

If you find it difficult to balance your chequing account, you may want to consider the best way to avoid nasty overdraft fees.

One of the best ways is to link your savings account to your checking account. In this method, your savings will cover a shortfall in the savings and avoid NSF and overdraft charges.

This makes sense, but there are other strategies to stay away from, as they will cost you more money.

In addition to the obvious problems linking your overdraft to Credit Card Cash advances,one type of overdraft protection consumer advocates recommend you stay away from is a "bounce protection" plan. Unlike a traditional overdraft protection plan, which keeps checks from bouncing and therefore avoids fees, bounce protection allows the bank to collect the fee anyway, points out Consumer Action, a nonprofit consumer advocacy group.

With a bounce protection plan, in exchange for covering an overdraft up to a set dollar limit, banks charge a fee similar to a "nonsufficient" funds fee, ranging from about $20 to $35 for each transaction. Some banks also charge a per-day fee of $2 to $5 until the account has a positive balance.

What's different with this plan is that customers can borrow against their bounce protection limit.

Bounce protection plans are designed to boost bank income by encouraging customers to overdraw their accounts. Because a limit of several hundred dollars is added to a customer's available balance, many people are lulled into thinking they have money in their accounts when they don't.

Before signing up for any overdraft protection, Consumer Action recommends you get answers to the following questions:

- What interest rate will I be charged? Banks may charge anywhere from 7 percent to close to 22 percent for lines of credit linked to overdraft protection. Interest rates on the credit cards linked to overdraft protection can range from 9 percent to 20 percent.

- How much is the transfer fee? You are most likely to encounter transfer fees on overdraft protection linked to a credit card or a savings account. For credit card overdraft protection, transfer fees can range from $3 to $10 a day. For savings-linked overdrafts, transfer fees ranged from $5 to $10 per day. It's also possible you won't be charged at all.

- Is there a minimum on each advance? Overdraft advances vary greatly. For example, some banks will advance you the exact amount needed to cover a transaction. Other protection programs advance cash in multiples of $100. If the bank lends only in multiples of $300, you would have to borrow $300 (and pay interest on it) even though you only need a few dollars to cover an overdraft.

- Is there an annual fee? Financial institutions typically don't charge an annual fee when the overdraft protection is linked to a credit card. However, many charged an annual fee for overdraft protection connected to a line of credit. Annual fees can range from $5 to $50.

While overdraft protection can save you money, be careful about leaning on it too much. The most cost-efficient way to handle your bank account is to wait until a deposit has been cleared before you write a check or use your debit or ATM card for a transaction.

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