Avoiding Debit Card Overdraft Fees

Consumers and members of Congress are up in arms about overdraft fees on debit cards, which were supposed to be the alternative to high-cost credit cards.

The classic example is the $3 cup of coffee, with a charge of a dollar or two triggering a mammoth penalty. Consumers can be hit with charge after charge without realizing it until the monthly statement arrives.

Legislation to curb the worst overdraft practices is moving through Congress. It would make it easier for customers to opt out of overdraft protection on checking accounts and would make overdraft fees proportional to the charge involved. The Federal Reserve is expected to write new overdraft-fee regulations by the end of the year.

This fall, some banks, including Bank of America (Stock Quote: BAC), JPMorgan Chase (Stock Quote: JPM) and Wells Fargo (Stock Quote: WFC) have begun to let customers out of overdraft programs, which are often automatic when you get a card.

But if you still have overdraft protection, because you want it or can't drop it, a number of steps can reduce the risk of fees, typically $25 to $35 whenever there’s not enough money in the account to cover a charge.

The simplest strategies are pretty obvious: Keep track of your spending and cash balance, use an old-fashioned checkbook, or look at your balance at an ATM or online.

When you do, be aware of the difference between a “pending” bank transaction, which can include a deposit that has yet to clear and is not available to pay charges, and a “processed” transaction such as a deposit that has cleared.