Beware Auto-Enrollment in Overdraft Protection

Among recent financial reforms, consumer advocates applaud the requirement that your bank ask permission before it enrolls you in overdraft protection. But the rule applies only to debit card transactions and ATM withdrawals. The bank may still automatically enroll you in an overdraft-protection plan to cover checks and electronic bill payments.

That means unless you keep tabs on your balance, you could still be forced to pay a hefty fee—or fees. Banks charge an average of $35 when your balance is inadequate to pay a check that is being processed. More than one overdraft in a single day can trigger multiple charges. For example, at PNC Bank, your first overdraft is $25; the second and any subsequent overdrafts are $36 each.

To start, find out whether your bank processes checks from smallest to largest. If it doesn’t and a balance-busting check is presented for payment, you could incur multiple fees. Also find out the amount that triggers an overdraft fee. Many banks set a $5 minimum, but some charge a fee if you’re overdrawn by even a penny.

Linking your checking account to a savings account or line of credit is a good way to avoid a charge for insufficient funds. When your balance is too low to pay a check, the bank will transfer the necessary funds to your account; banks generally charge $10 per transfer. But don’t make a habit of this. Some banks penalize you by charging more if they have to cover your account too frequently. A more costly option is to link your account to a credit card—you’ll pay a cash-advance fee of up to $10 plus incur interest charges as high as 25% on the loan until it is repaid.