Bank of America is settling the overdraft fee class-action lawsuit that alleges the bank knowingly manipulated customers’ deposits and withdrawals in order to maximize the fees they would receive. Although the banks aren’t completely to blame for the proliferation of overdraft fees, policies were so much of a problem that the government and regulators needed to step in. As a result of new regulations brought on by the Credit CARD Act of 2009, banks now require customers to opt in for overdraft protection, which about 90 percent of customers do. Those who do not would suffer the embarrassment of a declined debit card or, perhaps worse, the expense of a bounced check.

While limited by new regulations, banks are constantly looking for ways to increase profits, and when they can’t earn money by lending out deposits as much as they have in the past, they turn to increasing fees. According to recent research, banks project earning $38.5 billion from overdraft fees alone in 2009, up from $24 billion in 2008. In 2010, profit from overdraft fees set a new record, but due to a variety of fiscal accounting years in the industry, I don’t have the number on hand yet. 90 percent of these fees come from only ten percent of customers, so it would be fair to say that it’s more common to see a serial offender than a one-time offender.

You may find that it has been more difficult for those one-time offenders to talk their way to a reversal of a fee through customer service. In times like these, when the banks want to protect their money as much as possible, it makes sense for consumers to avoid overdraft fees in the first place.

If you follow these suggestions, there should be no reason for you to be charged an overdraft fee unless you make a mistake.

1. Balance your checkbook. There is a disconnect between the checking account balance according to the bank and how much money you have to work with. If you have a traditional personal checking account, the bank doesn’t know when you write a check. It’s your responsibility to know how much money you have available at any one time. The best way to do this is to keep a register. Start with your opening balance, and subtract from it every time you write a check and add to it every time you make a deposit.

2. Don’t forget about your debit card. It gets difficult to balance your checkbook if you also use a debit card to get cash or to pay for purchases. When you sit down at your desk to write checks to pay your bills, all of your financial information is in front of you and you can easily enter the check amount in your register. But when you use a linked debit or ATM card, you need to hold onto your receipts so you can enter the transaction into your checkbook at a later time. If you remember.

3. Access your checking account online. Online banking is one of the greatest benefits of the internet. Rather than waiting for your monthly statement in the mail, you can log onto your bank’s website and check your recent transactions at any time. If nothing else, checking the bank’s records for your account more than once a month helps you become familiar with the transactions that flow through your account and how low you like to keep your balance.

4. Keep your balance well above the minimum. Some checking accounts charge a fee if your balance dips below a certain minimum, but almost all will charge a fee if that minimum is $0. Give yourself a buffer. If you withdraw an average of $2,000 each month for your mortgage and other bills, don’t let your bank account float below $2,000. This way, you always have a month’s worth of expenses ready to protect you from $0. Since checking accounts often offer lower interest rates than savings accounts, particularly high-yield savings accounts, you will be giving up a small amount of interest income, but the protection might be worthwhile.

5. Link your checking account to a savings account. Many banks offer the option of linking a checking account to a savings account. In the even that your checking account dips below $0 due to a cashed check for which you have insufficient funds or a charge on your debit card, the bank automatically transfers money from your savings account to cover the withdrawal. Some banks will charge a fee for this service, but the fee is often lower than an overdraft fee.

6. Link your checking account to a line of credit. If you have good credit, this is a legitimate option. Rather than withdrawing funds to cover your overdraft from a savings account, the bank taps your line of credit. You will owe interest on the amount you borrow from your credit line, and you may owe an annual fee for use of the credit line, but the total fees could be substantially lower than a typical overdraft fee.

7. Ask to remove overdraft protection. Banks believe overdraft protection, even for a fee, is a service customers want. In many cases, that is true. If you send your mortgage or rent payment, you might prefer the large check not to bounce. Bounced checks cause problems for the recipient and the sender; overdraft protection eliminates this hassle. If it is not likely that you will bounce a major payment, it might make sense to ask your bank to remove the overdraft protection feature for your account. Keep in mind that you will still be charged a “returned check” fee if you bounce a check.

8. Track your finances electronically. There are many tools now that let you connect directly to your bank’s databases to download and list your transactions automatically. My current favorite is the desktop version of Quicken, but even with its robustness, this type of software may be more than what is necessary for avoiding overdraft fees in a checking account. I suggest signing up for a free service like Mint to monitor all your financial accounts in one place.

9. Create reminders and notifications. Many banks continue to improve their technological offerings for checking accounts. I know of at least one bank that will, if you enable this feature, send you a text message if your bank account decreases to a balance you define. For example, you might receive a notice when a cashed check reduces your balance to $95, five dollars below your established warning minimum of $100. If your bank doesn’t offer this feature, one of your linked services will. Although I don’t use this service often, I receive an email from Mint when my Wachovia personal checking account balance dips below $2,000.

10. Look for free overdraft protection. Some credit unions offer checking accounts with free overdraft protection. You can start at the Credit Union National Association’s credit union finder.

Overdraft fees happen to the best of us because we are all human and make mistakes. The best thing we can do is reduce the occurrence of these fees to a point at which it will be much easier to talk with the bank when the mistakes do happen. Opening a line of communication can help, and if you maintain a good conversation with customer service representatives, you may be able to convince banks to make an occasional overdraft fee disappear.

This negotiation works best when you have a positive history with the bank. The more overdrafts you have on your record, the less likely the bank will be willing to forgive your fees. If you prove yourself to be a good customer, you have a better chance of being rewarded.

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I chuckled when I received my replacement business debit card in the mail yesterday. Although I never had any problems with my account, and I’ve always received mail from Wells Fargo addressed properly, at some point, someone in the bank decided the name of the owner of my business accounts is “Business Customer.” As Wells Fargo is continuing to update their branding following their purchase of Wachovia, the bank wants to get new cards and documents in the hands of its customers. I know that large banks sometimes see their customers as nothing but numbers, but not much can be considered less personal than the bank referring to one of its patrons as “Business Customer.”

My Wachovia Visa Business Check Card would have been replaced with a Wells Fargo Visa Business Platinum Debit Card if it weren’t for this strange error. The “Platinum” moniker sounds fancy, but as far as I can tell, there are no features on this card beyond what I had previously, including a debit card form of a “zero liability” policy.

Rather than activating the card listing me as “Business Customer,” I called Wells Fargo’s customer service to have a new card with the correct name shipped to me. Besides waiting on hold for a business representative while my cell phone battery approached its daily little death — I could really use a new phone — the resolution was easy and I should have a new card in about a week. My old Wachovia debit card, which displayed only my business name, not my own name, on its face, will continue to work.

I am a customer of Wells Fargo for almost all of my business banking. Almost all business checks I send are initiated through Wells Fargo’s bill payment website, so I hardly use paper checks. I have not yet found a good Wells Fargo product that offers competitive interest rates for business savings. Most of my business cash is deposited at ING Direct, in a business savings account. I am looking for other options, though; if Vanguard were to offer a free cash management account for businesses with less than a total of $1,000,000 deposited or invested, I’d most likely move everything there to consolidate all business accounts at one location.

Photo: Tony Webster

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