5 Sneaky Overdraft Traps

INCURRING A SMALL fortune in overdraft fees no longer requires a poorly-balanced checkbook.

To boost revenue, many banks have jacked up fees and reworked policies to maximize the potential for overdrafts, putting even the most diligent account holders at risk, says Jean Ann Fox, director of financial services for the Consumer Federation of America. "You can get in the hole for hundreds of dollars before you even know it," she warns.

Indeed, financial institutions collected more than $17.5 billion in overdraft fees last year, reports the Center for Responsible Lending, a nonprofit policy group.

At the heart of the revenue stream: so-called courtesy overdraft policies, which allow banks to pay charges that would otherwise bounce. Instead of incurring an insufficient funds fee, account holders must pay an overdraft fee and reimburse the bank for the borrowed funds. Even worse: Most banks use software to single out and pay overdrawn funds without regard to the account holder's ability to pay back the overdraft and its associated fees. "It's the only form of credit that can be involuntarily imposed on you," says Chi Chi Wu, staff attorney at the National Consumer Law Center. "They've laid this tripwire, and there's no point to it except to generate fees."

Here are five ways a bank might try to trip you up with pricey overdrafts, plus advice on how to avoid them:

Solution: Ask the bank to set the debit overdraw amount on your account to zero. That way, any transactions that would put the account in the red will be rejected.

Banks justify the practice as a way to ensure the most important debits get processed first (say, so a mortgage payment doesn't bounce). But according to Sharon Reuss, spokeswoman for the Center for Responsible Lending, it's really a way to maximize overdrafts. Say you start the day with $100 in your account. You buy a latte ($5), fill up on gas ($50), buy groceries ($35), swing by the drugstore ($8) and then the dry cleaner's ($25). Processed chronologically, only the last transaction triggers an overdraft. Reordered from high to low, however, three purchases do.

Solution: Buffer your account with an extra $100 or so that you don't intend to spend, advises Reuss. Also, don't count on deposited funds until they show up as part of the available balance.

Solution: Set up real overdraft protection in the form of an attached line of credit, or automatic transfers from your savings account. It's much cheaper than the average $34.65 overdraft fee, says Wu. Citibank, for example, charges $5 annually for a line of credit. (Balances carry a 17.5% APR, however, so only use these accounts for temporary protection.)