Overdraft Protection Gets New Sales Pitch

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When Wachovia customers open their statements this month, they'll find an offer for a "back-up plan" providing "increased convenience" and "added flexibility."

Actually, it’s nothing new, just an offer for overdraft protection on checking accounts and debit cards — something customers have had for years. But banks are promoting the service now because of new federal regulations taking effect Aug. 15. Previously, many banks provided overdraft protection automatically, and often refused to cancel it. Under the new rules, the customer will get it only by signing up.

The rules are meant to protect banking customers from the high costs of overdraft protection, which allows you to use your debit card when there’s not enough money in the account to cover the transaction.

The fees, of course, haven’t gone away. Wachovia (Stock Quote: WFC) charges $22 for the first overdraft in a 12-month period, then $35 for each succeeding overdraft. Customers can be charged up to four overdraft fees per day, costing up to $140.

Paying $22 or $35 might not seem so bad if you desperately need a $1,000 car repair, but it would sting if you’d simply bought a $2 cup of coffee. Fortunately, there are better ways to set up an emergency back-up system.

One is to simply carry a credit card with balances well below the credit limit. That way, you could still use the debit card for ordinary expenses like lunch, gas and groceries. By not signing up for overdraft protection, you avoid accidentally triggering a charge. Of course, it’s best not to carry a balance on your credit card, else you could pay interest.

If your debit and credit cards are at the same bank, you may be able to “link” them, so that overcharges on the debit card would automatically by charged to the credit card.

Be sure to inquire about fees before setting this up. Some credit cards apply the fee used for cash advances to overdrafts, often an annual rate exceeding 20%. In many cases, there is no grace period on those charges. It might be better to just use the credit card for the transaction, so you get the ordinary interest rate and grace period.

Debit cards can also be linked to a savings account at the same bank, often with no fee when your savings is tapped for an overdraft. Unfortunately, interest earnings on savings accounts are so low that it doesn’t make much sense to have a savings account if its only purpose is to back up a debit card.

According to the BankingMyWay.com survey, the average savings account pays just 0.217%, or about 22 cents a year for every $100. At that level, why bother? You could just keep extra cash in the checking account to reduce chances of an overdraft.

Of course, the best system is to keep tabs on your balance so overdrafts don’t happen. You can do that online, by phone or at an ATM. Many banks also allow customers to set up automatic alert systems that will send an e-mail or text message when the account falls below a set level.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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