Never pay another bounced-check fee

You'd be smart to make sure there's always at least a small cushion of cash in your account. Don't let your balance drop below $100, and keep at least $400 in your savings account for emergencies (read "Why you need $500 in the bank" for details).

See if you can opt out

Some credit unions and banks, including Washington Mutual and Bank of America, will let you set up your checking account so that overdraft transactions are declined rather than processed. Others, like Wells Fargo, refuse to give you the option. If your account constantly runs on fumes, ask your financial institution if it will decline overdraft transactions. If not, look for an institution that will.

If you opt out of overdraft processing, though, you really want to avoid writing checks or using signature-based debit card transactions, since merchant fees for these bounced transactions are typically even higher than the ones banks charge.

Another option is setting up true overdraft protection, which links your checking account to a savings account, credit card or line of credit. You'll probably pay an annual fee of $10 to $50, and you may also pay a small fee each time the overdraft protection is tapped, but the total is likely to be far less than you'd pay under bounce protection.

Sign up for alerts

Most major banks and many credit unions will alert you via e-mail or text message when stuff happens in your accounts: when your balance drops below a limit you set, for example, or when certain transactions or deposits show up.

Such alerts, along with keeping a pad of cash in savings accounts, can help you transfer money into your checking account in time to cover pending transactions.

Don't count your deposits before they hatch

Although your checks and other transactions can clear almost instantly, banks can still put multiday holds on your deposits, particularly if your account is relatively new or you're depositing a large amount. Also, deposits that might seem "safe," such as certified checks or money orders, can turn out to be fraudulent and the cash can disappear from your account. Even regular deposits, like your paycheck, can get delayed.

Don't count on money until you see it actually post to your account. Even then, check with the bank to see if a hold has been placed on a large deposit, and wait at least two weeks to spend certified check or money order deposits.

Don't use your debit card for hotels, rental cars or gas

These providers routinely put "holds" on your checking account as a kind of security deposit to ensure their bills ultimately get paid. The amount of the hold can be hundreds of dollars more than you actually owe, and the hold makes those funds unavailable until it's released, which can cause other transactions to bounce in the meantime.

Use a credit card at these venues instead.

Consider using 2 checking accounts

If you have trouble figuring out how much you need to leave in your account for bills, and how much is available for other spending, take away much of the guesswork by using two checking accounts.

This method takes a little work to set up initially, but posters on the Your Money message board who have tried it say it works like a charm.

You first need to total up your recurring bills for the whole year: mortgage or rent, utilities, car payments, student loan payments, insurance, taxes, the works. Divide the total by the number of paychecks you get in a year: 12 if you're paid monthly, 24 if you're paid twice a month, 26 if you're paid biweekly or 52 if you're paid weekly. Set up an automatic transfer within a day or two of your payday to whisk that amount from your primary checking account to your bill-payment account. Some of the Your Money posters who use this approach set up automatic bill payments, so their bills are paid without further effort on their part, while others pay bills themselves online.

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There are some drawbacks to this approach. It may take a few months to figure out the right amounts to transfer each payday, particularly if you have a lot of variable bills (or forget about a big non-monthly bill, like an annual insurance premium). You also need to keep track of two account balances, instead of one.

But you can tell much more easily how much cash you have available for spending on groceries, gas, clothes, entertainment and other "non-bill" expenses.

Your balance in the first account is available to cover those costs.

If your bank won't give you a second checking account for free, consider using the no-minimum, no-fee online payment accounts offered by Internet banks including ING Direct and HSBC Direct.

If you're diligent, the techniques I've outlined should help you avoid overdrafts and overdraft fees. If you're not happy with the big change in bank policies regarding overdrafts, though, you can do more than complain. Tell your lawmakers to support HR 946, a bill introduced by Rep. Carolyn Maloney, D-N.Y., that would require consumers be warned if an ATM transaction will trigger a bounce fee and to consent before they're enrolled in bounce protection by banks.

Columns by Liz Pulliam Weston, the Web's most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published Aug. 6, 2007

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