Answer: Your bank isn’t the real problem here. Yes, banks can charge sneaky fees, and sometimes their disclosure leaves a lot to be desired. But you’re severely mismanaging your money if a $25 fee can cause this big a problem.

You should keep at least a $100 pad in your checking and keep an eagle eye on your balance to try to prevent overdrafts in the first place. If overdrafts occur despite your best efforts, then your priority should be repaying those — not writing more checks.

If you can’t manage that, then you should turn off your ability to overdraft. If you have true overdraft protection — your checking account is linked to a line of credit or credit card — ask your bank to discontinue that. You also should decline the bank’s “bounce protection,” which allows overdrafts on ATM and debit card transactions in exchange for a fee. Recurring transactions and checks can continue to trigger overdraft charges, however, so your best bet is to switch to your debit card and cash until you have a better handle on your cash flow.

The change should save customers a whole lot of money if they don’t sign up, since over-limit transactions using debit cards will simply be declined rather than generate $35-a-pop fees.

But there are still plenty of other ways your bank can gouge you. You probably know about foreign ATM fees, monthly maintenance fees and even fees to talk to a teller. But you may not know about:

Other types of overdrafts. The change requiring an opt-in for bounce protection applies only to debit card and ATM transactions. It doesn’t apply to overlimit checks or automatic payment for recurring bills, which the bank can still process and assess you with a bounce fee. So you still have to pay attention to your balance, and I’d recommend signing up for true overdraft protection, which links your checking account to a savings account, line of credit or credit card. However, you should beward:

Credit card overdraft. Linking to your savings account or a line of credit will typically be much cheaper than having your true overdraft protection linked to a credit card. That’s because overdrafts typically will be treated as a cash advance, triggering fees of 3% to 5% plus sky-high interest rates that kick in immediately with no grace period. Credit card overdraft likely still will be cheaper than bounce protection, but you’d be wise to choose one of the other two options, if available.

Excess activity fees. If you make too many withdrawals or transfers from your savings account, your bank can slap you with a fee. Banks will say this is because of federal Regulation D, which limits such transactions in savings accounts, but the reality is that banks have an option: they can charge fees, or simply refuse to honor the excess transactions. Guess which option many banks choose? Oh, and some banks have their own definition of what constitutes an “excess.” Regulation D says the limit is 6 transactions, but Bank of America starts charging you after 3 if you have less than $2,500 in your account. Know your bank’s limits and make sure you stay within them.

Overdraft fees in “closed” accounts. A bank can honor outstanding checks and recurring payments, generating bounce fees, even if you’ve closed the account and taken your money elsewhere. If you’re switching banks, follow these rules for a bounce-free transition.

Returned deposit fees. You get a check, deposit it and see the amount reflected in your balance. You start spending the money, only to get a notice from your bank that the check wasn’t good. Not only are you out the money, but you’ll likely have to pay a fee on top of that, plus deal with any overdrafts the bad check caused. It’s hard to avoid getting stiffed this way, but you might want to avoid spending any deposited money for at least a week. If you get assessed a returned deposit fee, you can add that to the amount the check writer owes you.

photo credit: squidpants

Starting July 1, banks won’t be able to charge bounce fees on ATM or debit card transactions unless the customer has opted in to an overdraft service, the Federal Reserve announced today.

Bounce fees have become a real plague on the U.S. bank patrons, as banks quietly replaced true overdraft protection with “courtesy overdraft” or “bounce protection” services that patrons didn’t ask for–but that generate far more fee income. A single lapse can rack up multiple $35 fees, and many banks re-order transactions to maximize the chances transactions will bounce.

The Fed move is good, but isn’t enough, because:

• It doesn’t cover check or recurring-debit transactions
• It doesn’t cap the amount or number of fees that can be charged
• It doesn’t prevent banks from manipulating how they process transactions to increase fee income

Bills that would put such restrictions on banks have been introduced by Christopher Dodd in the Senate and Carolyn Maloney in the House of Representatives.

For more, read:

• Decline my debit card, please
• Never pay another bounced-check fee
• Don’t be duped by bounced-check “protection”

Recently, I have had an overdraft experience that leaves me wondering about ethics and legalities. It was three days from payday and I had about $45 in my account.

I made four purchases under $10. Then a $54 automatic payment came through that I could not reschedule. One would think I would then be charged one overdraft fee, as all of the previous purchases made were within my available funds at the time.

I logged in today to find that the bank cleared the largest transaction first, which threw all other small transactions into overdraft. I was charged five overdraft fees because of this rearrangement of clearance order. I talked to a customer service manager who said that nothing could be done.

Essentially, it appears that the bank is manipulating transactions to capitalize on overdraft fees. This strikes me as unethical, and I wonder if I have any rights in this situation? Aside from getting a better job and making more money, what can I do to protect myself?

Answer: Of course the bank is manipulating your transactions to increase its fees. Most banks do. Lawmakers and regulators have questioned the practice, but so far it’s not illegal.

What you can do to protect yourself is to stop living paycheck to paycheck. That may sound like a flip answer when you’re on the financial edge, but you’ll never get ahead as long as a $54 overdraft can throw your finances into chaos.

Having just a $500 cushion in the bank can reduce not just bounced-check fees but also worry, sleeplessness and lost productivity at work, according to a savings review by Stephen Brobeck, executive director of the Consumer Federation of America.

How do you get a cushion? Try a “no spending” month. Limit your purchases to true essentials. Eat out of your cupboards instead of at restaurants. Entertain yourself at home or at the library. Most people can raise at least a couple hundred dollars this way, which you could supplement by having a yard sale and selling unneeded items online.

If you want more ideas, there are a wealth of frugal-living websites; start with one of the oldest, the Dollar Stretcher, at www.stretcher.com.

You also need to limit the bank’s ability to swamp you with “gotcha” fees.

First, sign up for true overdraft protection. Banks often automatically enroll you in an inferior substitute, called “bounce protection” or “courtesy overdraft.” These programs allow the banks to approve over-limit transactions and charge you $30 or more for each one.

True overdraft, by contrast, links your checking account to another of your own accounts: typically a savings account, line of credit or credit card. If your transaction exceeds your balance, the money is drawn from one of these accounts. You’ll pay an annual fee of around $50 and possibly a $10 per transaction fee, but the costs for making a mistake will be substantially lower than under bounce protection.

If the bank won’t approve you for true overdraft, ask it to stop approving over-limit transactions. If it won’t, take your business elsewhere.

Here’s what I wrote about a couple years ago about the relatively new phenomenon of “courtesy overdraft”:

A few years ago, banks would typically decline an ATM, debit card or check transaction if there wasn’t enough money in the customer’s account.

Today, however, many banks and credit unions routinely allow these transactions to go through and then slam their customers with overdraft fees. A single $5 transaction can trigger a $30 to $35 overdraft fee, while a series of overdraft transactions in a single day can rack up hundreds of dollars in fees, usually without warning to the customer.

These policies, often marketed as “courtesy overdraft” or “bounce protection,” have caught on like wildfire: The number of financial institutions employing fee-based overdraft services grew 80% between 2003 and 2005 to 3,500, according to the Center for Responsible Lending, and the fees charged now top $17.5 billion a year.

Some might say, “So what? Keep enough money in your account, and you won’t overdraw it.”

True enough. But few of us are perfect, and the penalty for even a single lapse can be ridiculous. The Wall Street Journal today quoted one man who paid over $500 in bounce penalties for a series of small transactions, and he’s far from alone.

What’s more, people don’t sign up for courtesy overdraft. It’s imposed upon them. The first time they learn they have it is typically after they’ve wracked up significant fees.

And some banks even encourage you to overdraw your account by adding the total amount of your “courtesy overdraft protection” when you check your account balance at an ATM. So you may think you have $300 in your account, but $200 of that is courtesy overdraft. Spend more than $100, and you’ll get slapped with fees.

This is punitive and unfair. It’s time banks were forced to come clean about how bounce fees work and give you the option of opting out.

If you agree, you can send your opinion to the Fed by using a form at DefendYourDollars.org, a Web site run by Consumers Union, publisher of Consumer Reports. CLICK HERE to access the form.

To protect yourself in the meantime, call your bank and opt out of courtesy overdraft, if you can. Try to sign up for true overdraft protection, which links your checking account to a savings account or line of credit.

For more, read:

• Decline my debit card, please
• Never pay another bounced-check fee
• Now bounced checks can trash your credit