I have a few techniques and alternatives listed and they are explained below.  Nothing is for free, so you may be making some trade-offs on services and benefits based on your needs.  Hopefully one of these options will meet your needs.

1. Bank With Someone Who Doesn’t Charge Overdraft Fees

After years of seeing people frustrated with overdraft fees, I have decided to give people a way to open a checking account that doesn’t charge overdraft fees or sky high interest rates.

2. Don’t Trust Your Available Balance

Banks receive a notification when a direct deposit is about to hit your account, usually a day or two in advance of the actual deposit.  This includes the amount of the direct deposit.  As a result, many banks list your “available” balance as the funds in your account PLUS any direct deposits that are about to come in.  However, if you try to use this money the bank will charge you an overdraft fee because the funds are not yet in the account.

3. Keep A Cushion In Your Account

While many of us can’t afford to do this, it will help those who can.  Keep an extra $100-$200 in your account at all times.  This will help catch slip ups and cover what the banking industry calls “holds” on the account.  A hold is when someone, such as a gas station, runs a check on your account to verify you have funds.  The gas station will stake a claim, or as the banking industry calls it, “put a hold” on the account, for a predetermined amount of money (usually $75-$100).  While the gas station doesn’t actually take this money, for the next 3-5 days it will be unavailable for use in purchases, therefore causing you to overdraft your account.  By leaving a cushion in your account, holds like this won’t affect your account and cause you to overdraft.

4. Use Line of Credit

Many institutions offer a line of credit option that kicks in before overdraft fees.  This is usually a small loan that will be placed in your account anytime you go over your balance.  These loans are typically given in $100 increments, so make sure you watch how much money was put in your account so you can reapply it to the loan and avoid interest!  There is a finance charge associated with lines of credit but these are much smaller charges than overdraft fees.

5. Formally opt out of your financial institutions program.

You can accomplish this by formally notifying your financial institution that you want all items that are presented on your account declined or not paid.  Financial institutions are very sensitive to your requests to “opt out” today, and will honor it.

For debit card transactions, the largest number of transactions for most of us, this means the transaction will be declined but no fee will be generated.  The cost of this approach is two-fold:  you may have transactions declined when you really need them to be paid (e.g., using a debit card to pay for a meal after dining), and the financial institution will still charge the overdraft fee on paper items that they return, such as checks.

6. Go to prepaid cards and accounts.

You can manage your transactions with a pre-paid card that will not charge overdraft fees by not allowing any transaction to post that exceeds the funds in your account.   In this way, no overdraft fees can be generated.

The costs of these programs are some limitation when compared with a regular checking account and some fees are applied, but much lower than overdraft fees.  For a detailed analysis of this option, check out this video showing the Green Dot prepaid card sold by Walmart:  http://www.youtube.com/watch?v=qJLKrAi2FPU