by Moe Zilla

Created on: July 12, 2010

In 2010 the U.S. government placed new regulations on the way banks can handle overdrafts. Banks are no longer allowed to charge overdraft fees on ATM withdrawals or debit card transactions unless their customer specifically requested "overdraft protection" from the bank - and was made aware of all the fees that would come along with it! Many customers are now opting to have the bank decline the transaction, and it's not just to avoid the overdraft fees. They'll also be able to discover - in real-time - exactly when it was that their account balance has hit zero!

That's a good first step, since most people will stop spending money once they realize that they no longer have any of it. But a "stealth overdraft" can also occur with a credit card. Once the account's balance drops to zero, there's still that once-a-month credit card bill that's going to need paying. In the short-term, your best solution might be transferring the balance to a card with a lower interest rate. But at least one financial adviser suggests a more permanent solution: cut up your credit cards. This makes it easier to avoid the temptation of overdrawing your accounts.

Banks love it when accounts are overdrawn. This allows them to charge expensive extra fees for covering the overdraft - and I've heard some banks make a point of cashing the largest checks first, to increase the chances that all the remaining checks will then fall into "overdrawn" status. In July, one blog reported that banks collect over $38 billion just from service charges on their customers' deposits. Ironically, tax payers had to loan "overdrawn" banks over $750 billion during the mortgage meltdown of 2008, without collecting any extra fees of their own. That's probably the best reason to get rid of overdrafts: revenge.

Overdrafts send a very simple message: you're spending more than you're making. It's a wake-up call for anyone who's in denial about the imbalance in their cash-flow, and in the long-run there's only two ways to deal with the problem of overdrafts. The first way is to earn more money. Whether it's by taking a second job or just upgrading to a higher-paying position, this is obviously one of the best permanent solutions to the problem of overdrafts. And the other obvious option  to reduce spending. Whether it's a cheaper apartment or just spending less on entertainment - the best way to stop overdrafts is to simply stop spending too much money!

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