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5 Ways to Cut Costly Overdraft Fees

(CBS NEWS) Overdraft fees are raking in billions of dollars for the banking industry. But who's paying them? Predominantly a tiny subset of consumers: young, working in lower-wage jobs and heavy users of debit cards.

Surveying 304 individuals who reported paying more than $100 in overdraft fees during the past year, the Pew Charitable Trust found that the bulk -- 67 percent -- of those paying hefty overdraft charges are working but earning less than $50,000 annually. Roughly one-third earn $25,000 or less. Their preferred method of payment is a debit card, and more than a third of them are under age 36.

Nearly a quarter of those surveyed said they paid more than a week's wages in overdraft fees in the past year, with one in four reporting that the charges added to $300 annually or more. Nearly one in five of these individuals said overdrafts cost them $500 or more last year.

No wonder officials at the Pew Charitable Trust are pressing financial regulators to write new rules that would encourage banks to offer affordable short-term loans to this vulnerable population to reduce the number of costly overdrafts. However, rules and protections are already in place that could dramatically cut your chance of facing an overdraft fee.

Here are five things you can do to eliminate some of these costly charges.

Opt out: A six-year-old consumer-protection law requires your bank to get affirmative permission to enroll you in an overdraft protection program if it wants to charge overdraft fees. The problem is that some consumers don't understand that a service sounding so benign -- "would you like us to cover your charges if you have insufficient funds to complete a transaction?"-- will cost an average of $35 when it's triggered.

Tragically, it's most likely to be triggered by small ($24 on average) and highly discretionary debit card transactions, like your daily Starbucks run. Just 24 percent of overdrafts were "absolutely needed to make a purchase" regardless of the consumer's bank balance, according to previous surveys.

We'll talk later about how to cover those rare occasions. In the meantime, check with your bank and find out whether you opted in to overdraft protection. If so, tell it you want to change the election and opt out.

Link accounts:If you do sometimes need to buy gas for your car when the checking account is empty, look into covering overdrafts with a linked savings or credit card account. Most banks offer these programs at a much lower cost than overdraft fees. Typically, transferring money from a linked account will cost $10 -- which is $25 less than the average $35 overdraft fee. So, if this happened four times in a year, you'd save $100 with a linked account.

Use credit or cash: Millennials grew up on debit cards that were sold on the promise that the money came directly out of your bank account, which would prevent you from spending more than you had. But debit cards have become dangerous for a variety of reasons, including the fact that they give you no warning when swiping this card to cover a $5 parking meter would trigger a $35 overdraft.

If you don't like to carry cash, apply for a credit card. Credit cards give you a minimum of 20 days to pay the balance before you're charged a penny in interest for a typical credit card swipe. (The rules are different if you get a cash advance.)

Even if you need to leave a balance on the card for a little while because some emergency forced you to pay more than you could afford for some purchase, the interest rate is likely to amount to far less than the cost of the overdraft fee. More than a dozen websites, including CardHub and LowCards.com, can help you shop for a credit card that suits your needs and credit score.

Budget: It's not sexy, but writing down how much you spend each month and where you're spending it can help you identify the things that throw off your financial life enough to cause running out of money before you run out of month. Sure, it could be that you simply don't earn enough. But 33 percent of those who regularly overdraft their checking accounts earn more than $50,000 annually, so that's often not the case.

What's throwing you off? It could be that you fail to account for big irregular bills, such as car insurance or repairs; that you have more loans than you can handle; or that you simply spend too much.

The only way to know is to jot down where your money has gone over the past year. It's pretty common to discover in the process that you're spending more than you intended on something that's not precious to your life. And that makes it easy to cut those expenses to save more or redirect your spending to things that matter most.

Save: Even if it's just $10 or $20 a month, saving a little bit regularly builds up. And a few hundred dollars in savings can eliminate many a financial emergency.

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