We all know how hard it is to deal with those overdraft fees. Even on a very small expenditure of just a few dollars an overdraft fee can be as much as $39. That does seem a bit excessive when the consumer is pinching pennies to begin with. New regulations that are scheduled to start July 1, 2010 are aimed at reducing the chances of that happening.

According to Ben Bernanke, the Fed Chairman, the new rules will be a step in the right direction for consumer protection. Account holders will be given the opportunity to opt in or out of overdraft protection on their accounts. Presently, about 75% of banks are automatically enrolling their account holders in overdraft protection.

These new rules will not affect the banks ability to automatically enroll their account holders in overdraft protection for checking accounts but it will for ATM and debit card transactions. Since a majority of transactions are being done today through the use of ATM’s and debit cards it is easy to see that the added expense of overdraft fees would easily decline when these new rules go into effect.

This does not mean that the consumer will not be offered the benefit of overdraft protection. It just means that the account holder will be given the opportunity to choose whether or not this option is right for them.

Along with the Fed’s new rules, the Congress is also planning action that will regulate overdraft fees. The Senate wants to allow band regulators to set the fees that are collected for overdraft protection that are both “reasonable and proportional” and will require that banks allow the consumer to set the account balance right if done on the same day that the overdraft fee is charged.

The House wants to limit the number of times that banks can charge an overdraft fee to 3 times a year, and make it mandatory that they inform an account holder when their account is nearly depleted in an effort to help them decide if a purchase is worthy of an overdraft fee.

Even though these Congressional proposals will not go into effect until 1 year after they are passed, they would restrain banks from increasing the amount of their overdraft fees in the interim.

Although these new rules seem particularly egregious to the banking industry, consumer advocates agree that these measures are a step in the right direction for consumer protection.

Banks are expecting to earn over $38.5 billion in overdraft fees alone this year. But these fees are completely voluntary, which basically means you’re choosing to pay these banks more than they’re asking you to. What’s the point of signing up for a completely fee free checking account if you’re going to choose to pay the bank $20 or more per overdraft? Learning how to avoid overdrafts will keep that hard earned money in your pocket, instead of going into the bank’s pocket.

An overdraft is defined as any time your account goes into the negative for any reason, unless it was due to a systems malfunction. So anytime you spend more than is in your account, you will be charged an overdraft fee. This fee can range from $5 to up to $50, depending on the bank. When you sign up for an account, make sure you examine the fees associated with the account. Even fee free accounts usually charge an overdraft fee, which must be shown somewhere in the paperwork you’re provided when you open an account. You can also visit or call your bank and ask about the overdraft fee amount.
Overdraft fees are such a problem that the Federal Reserve is currently working on changing how banks can charge consumers with them. They’re completely avoidable if you can keep your account balance out of the red, which is simply a matter of keep a good tally of your deposits and expenses as they occur. Or, for a more simple approach, use a prepaid debit or credit card.

Here are five ways to avoid overdrawing your account and incurring these fees:

1. Create a monthly household budget and stick to it. Make a list of your monthly expenses, including rent, utilities, car-related expenses, groceries, medical expenses, etc. Total the amount of these expenses and subtract it from your total monthly income. Most people underestimate their expenses, so you may want to multiply your total expenses by 20% and add this amount to your total expenses as a buffer. If you have money left over, stash it into a savings account for emergencies. If you don’t have enough money, you need to adjust your spending.

2. Balance your checkbook. By keeping a running tally of how much money you have, you will be less likely to overdraw your account. To balance your checkbook, write your current bank balance on the top line of your checkbook register. Add to that amount each time you deposit funds, and subtract from it each time you make a purchase. Make sure to record your debit card purchases in your checkbook register as well. After balancing your checkbook for a few months, you will have a more realistic idea of your monthly expenses, and you may want to re-evaluate your monthly budget.

3. Don’t rely on your available balance. Just because your online bank account balance or ATM receipt shows that you have money in your account doesn’t mean that you do. You may have written a check that hasn’t been cashed yet or perhaps the funds from your direct-deposited paycheck have not posted into your account yet. It is always better to refer to your checkbook register for your actual account balance.

4. Insulate your account with a safety cushion. Set aside a chunk of money to serve as a safety cushion. This cushion can be in any amount but ideally should be no less than $100-200. Subtract this amount from your account balance in your checkbook register as if it were money that you never had and then forget that it’s there. When your checkbook balance starts to get low, reduce your spending; and when it reflects $0, stop spending altogether. You will still have the cushion in your account in case you made a mathematical error while balancing your checkbook or in case someone cashes a check you had forgotten about. Make sure never to borrow from this safety cushion.

5. Research overdraft protection alternatives. Some banks offer overdraft protection as a free service. Others will allow you to connect your checking account to a savings account; if you overdraw your checking account, it will cover the transaction with funds from your savings account. Some banks also offer a line of credit for your checking account if you have good credit. If you overdraw your account, the overdraft amount is financed as if it were a credit card purchase. You will owe interest on the amount borrowed against your line of credit, but this finance charge will most likely be less than the amount of the overdraft fee.

The fact is that if you are consistently being charged with overdraft fees, you have probably not been keeping track of your check writing and are paying whopping fees to make it right. The question is how to avoid overdraft fees.

Here is a list of activities that you can engage in to prevent future overdraft fees.

1.      The number one step that you can take to prevent overdraft fees is to keep track of all checks that you write. Make sure that you enter each transaction into your register as soon as you write them and subtract immediately to get a balance to work with.  Don’t forget about the monthly service charges, they should be subtracted as well.
2.      Make sure that you also record ATM transactions and any fees there. Just because you did not write a check is no reason not to place these transactions in your register. Even if you use duplicate checks, you should still keep your records up to date so that you know what you have to spend.
3.      Write out a budget and stick to it. Knowing what you have to spend and only spending that amount will help you to avoid unplanned for expenditures that can get you into trouble.
4.      If you have automatic payments coming out of your checking account each month, don’t forget to enter them and subtract those amounts at the beginning of the month so that you will not forget about them. If your budget is tight and those payments are scheduled to coincide with weekly or bi-weekly paychecks record the payments when you make your deposits. You may want to work those payments into your register by skipping ahead a bit so that you will not forget.
5.      You should always review your statement each month and reconcile it with your register by subtracting any outstanding checks or fees that are not shown.
6.      Check with your bank to see if you can add an overdraft line of credit to your account to prevent the large overdraft fees. The cost of doing this is about $15 annually plus 12% apr when it is used. The cool thing here is that if you never need to use it the interest is never charged.
7.      Create a cushion amount that you will never allow your account to go below. Promising yourself that you will not write a check if your account balance is at or below say $20 or $30 can help you avoid those extra charges.
8.      Check with your bank to see if you could link your savings account to your checking account allowing them to transfer between accounts for those occasional lapses to prevent those overdraft fees. Fees for this service are usually less than you would pay for an overdraft. Just don’t take advantage of it too often or your savings will dwindle to nothing.
9. Another tactic to use that many are unaware of is to get to know your banker. If used properly, this technique can be effective. By getting to know the person in charge of your account, they may be willing to occasionally forgo the overdraft charges if you let them know quickly that you may be overdrawn. Of course, timing is the key and still requires that you keep track of your balance.

By applying consistently any or all of these techniques you should be able to avoid overdraft fees and save yourself a bundle of money.

It is because practices like these that people like Chase and Bank of America have lost the trust of the people with their pre-paid cards and their minimum payment plans.  The people simply do not trust them anymore and with good reason.  The truth is that only do people like Kenneth Lewis, the former Bank of America Chief Executive Officer take your money with outrageously high overdraft fees, but the taxpayer is also paying his salary for the year thanks to the bank bailout bill, so not only do corporate suits like Lewis steal from the little person as they are walking through the front door, they get you on the way out as well.  You need the people in Congress to ask tough questions about where exactly all of your money is going and whether or not.  Not only does there need to be caps upon the salary compensation, but there also need to be caps on these pre-paid card induced fees.

The question truly becomes where does the average person turn to get justice and get their money back during these tough economic times that are just compounded by overdraft fees?  The answer is nowhere because the average person simply does not have the resources to challenge the general counsels  of these multinational banks.  It is shameful that people could charge a huge four hundred percent fee just because you were late on a few bills as you were making sure you had health care and food on the table.  You certainly don’t get any rest or relief from the credit card companies, given that they practice many of the same misguided policies as the banks.

People simply can not say this is far at a time when unemployment was at its highest levels in a generation and people are losing their homes, that the overdraft fees attached to debit cards for example are what America can tolerate right now.  You should ask tough questions as to why people think these fees are so huge in many situations.  The simple fact is that in many cases this is a situation where the illegal process of usury is happening.  The people who pay taxes and work hard should not be punished for wanting to purchase new things for their children.  There certainly is a part of personal responsibility involved in this situation, but we must not lose track of humanity when we are talking about material or financial items.

Too often in America, the people who are charging fees have lost their sense of humanity and decide to worry more about collecting money from a poor person’s bank account.