Avoiding the overdraft

As of July 1, federal regulations require that when you open a new bank account, you will have to choose to be covered by overdraft services for one-time, point-of-purchase debit card or ATM transactions. If you choose not to enroll in such services, your ATM or debit card will be declined if you try to make a purchase and there isn’t enough money in your account to cover it. For current account holders, the new rules will go into effect on Aug. 15. The new rules do not apply to checks or automatic bill payments you may have set up to pay bills such as your mortgage or utility bills.Why have these changes been made? You may have read stories in the news about people inadvertently paying $35 for a cup of coffee by using their debit card at the coffee shop. How could that happen? It’s simple — you use your card to buy something, but there isn’t enough money in your account to cover the expense. For example, maybe you forgot to make a deposit, or you paid for the week’s groceries and didn’t note it in your checkbook.As a standard service, many banks will cover such an overdraft until you make a deposit to cover the difference, but there’s a fee for that, which could add $20 to $35 to that cup of coffee. In the past, most ATM and debit card transactions were covered with such standard overdraft services automatically built into the account. As outlined above, however, you will now have to choose (or “opt in”) to have the bank automatically cover such overdrafts.Why opt in? Let’s say you’ve just done the family’s grocery shopping for the week. You get to the register and, using your debit card to pay, you discover you don’t have enough money in your account. If you were participating in an overdraft service, your purchase may be completed and the bank will charge you a fee. Without it, the transaction will be declined.Most banks offer different types of overdraft protection services and programs. The standard service charges a flat fee (generally $20 to $35) for each overdraft. But if you are prone to making overdrafts — and let’s face it, some of us are simply better at keeping our books than others — you might want to consider an overdraft protection program.These programs work in one of two ways. The first links a savings account to your checking account, and with this type of plan, your bank will automatically transfer funds from savings to checking to cover an overdraft, usually at a lower fee than standard overdraft charges.Another type of overdraft protection program involves a line of credit linked to your checking account. If you accidentally use your ATM or debit card for more than is in your checking account, the money is automatically drawn from your line of credit.Since this is essentially a loan, a separate loan application is generally required, and interest charges/standard fees apply.Of course, the best option is to avoid overdraft charges completely, if you can. Here are a few tips on how to do that: • Keep track of your spending: If you create a budget, you’re more likely to know where your money is going and when. Part of your budget can include keeping a “cushion” in your checking account to avoid embarrassing situations at the checkout stand. • Keep track of your balance: Faithfully entering your expenses in a budgeting program also keeps you up-to-date so that you always know how much is in your checking account. • Communicate: Make sure, if your account is jointly held, you know who is spending money and when. That way, you’ll avoid surprises when you go to make purchases. • Keep track of your cards: These days, most of us carry multiple cards, and it’s easy to reach for the wrong one. Grabbing your debit card when you meant to use a credit card can cause problems if there isn’t enough money in your checking account.One suggestion is to use certain cards only for certain types of purchases, to make tracking expenses easier.The most important part of the new regulation is that you get to choose. If you want the protection of overdraft services for everyday debit and ATM transactions, and many banks still offer them, you just have to opt-in.Paul Rizzi is president of Concord-based Merrimack County Savings Bank.