Fee-Free Overdraft Protection: Banks Offering Alternatives

It's the best of both worlds -- more flexibility without getting charged.

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There are different ways banks make money, but a big one is by charging customers different fees. Those fees can vary from institution to institution, and they're sometimes avoidable. But when customers land in a pinch, sometimes, overdraft fees are hard to skate.

Overdraft fees apply when customers make transactions and don't have sufficient funds in their checking accounts to cover them. Often, banks will allow those transactions to go through but will charge fees for fronting that money.

Last year, Ally Bank announced it was doing away with overdraft fees. And now, it's introducing a new program that gives consumers more leeway without automatically being hit with extra charges.

A new option for customers: CoverDraft

Ally's new CoverDraft program is designed to serve as a safety net for accidental overdrafts, which can happen to the best of us. Under this new program, customers will generally qualify for CoverDraft after depositing $100 into their checking accounts. Then, if they overdraw their accounts, CoverDraft will cover up to $100 of qualifying transactions and consumers will have 14 days to deposit funds back into their accounts to make up the difference.

Transactions that qualify for CoverDraft include:

• Debit card purchases
• Recurring monthly payments
• Transfers initiated at other banking institutions
• Checks or transfers initiated before overdrafting an account

Will more banks take a similar approach?

Last year, the Consumer Financial Protection Bureau announced plans to crack down on overdraft fees. In the wake of that announcement, more banks have started making plans to reduce or eliminate them. As such, we could see an uptick in institutions that offer a similar program to Ally's CoverDraft -- programs that give customers added flexibility.

Avoiding overdraft situations

The purpose of CoverDraft is to give customers leeway when they accidentally overdraw their accounts. The program is not supposed to function as a line of credit of sorts, but rather, as a last resort.

There are several steps consumers can take to avoid overdraft charges. First, they can check their bank account balances regularly. Peeking in once a week could alert consumers to when their balances are shrinking. That could, in turn, prompt consumers to cut back on spending until their next paychecks arrive.

Having a solid savings account balance can also help consumers avoid overdraft fees. Many banks allow transfers from savings accounts to checking accounts to happen on the spot, so if a given transaction will put a checking account balance in the red, a transfer from savings can come to the rescue.

Finally, sticking to a budget can generally help consumers keep their spending in check under normal circumstances -- meaning, outside of emergencies or unplanned expenses. And that, too, could result in fewer overdraft fees.

While the Consumer Financial Protection Bureau hasn't announced plans to ban overdraft fees outright, it's definitely getting more serious about them. Ally's CoverDraft is a nice solution that allows consumer transactions to go through even when customers are a little short -- all without resulting in the instant fees account holders have come to dread.