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Money Talk: Overdraft 'protection' can be deceiving

Q: Like many Americans, I often must scramble to make ends meet between paychecks. I vigilantly monitor my account online, and when my balance is getting low, I curb my expenses as best I can.

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Q: Like many Americans, I often must scramble to make ends meet between paychecks. I vigilantly monitor my account online, and when my balance is getting low, I curb my expenses as best I can.

Recently, I have had an overdraft experience that leaves me wondering about ethics and legalities. It was three days from payday and I had about $45 in my account.

I made four purchases under $10. Then a $54 automatic payment came through that I could not reschedule. One would think I would then be charged one overdraft fee, as all of the previous purchases made were within my available funds at the time.

I logged in today to find that the bank cleared the largest transaction first, which threw all other small transactions into overdraft. I was charged five overdraft fees because of this rearrangement of clearance order. I talked to a customer service manager who said that nothing could be done.

Essentially, it appears that the bank is manipulating transactions to capitalize on overdraft fees. This strikes me as unethical, and I wonder if I have any rights in this situation? Aside from getting a better job and making more money, what can I do to protect myself?

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A: Of course the bank is manipulating your transactions to increase its fees. Most banks do. Lawmakers and regulators have questioned the practice, but so far it's not illegal.

What you can do to protect yourself is to stop living paycheck to paycheck. That may sound like a flip answer when you're on the financial edge, but you'll never get ahead as long as a $54 overdraft can throw your finances into chaos.

Having just a $500 cushion in the bank can reduce not just bounced-check fees but also worry, sleeplessness and lost productivity at work, according to a savings review by Stephen Brobeck, executive director of the Consumer Federation of America.

How do you get a cushion? Try a "no spending" month. Limit your purchases to true essentials. Eat out of your cupboards instead of at restaurants. Entertain yourself at home or at the library. Most people can raise at least a couple hundred dollars this way, which you could supplement by having a yard sale and selling unneeded items online.

If you want more ideas, there are a wealth of frugal-living Web sites. Start with one of the oldest, the Dollar Stretcher, at www.stretcher.com .

You also need to limit the bank's ability to swamp you with "gotcha" fees.

First, sign up for true overdraft protection. Banks often automatically enroll you in an inferior substitute, called "bounce protection" or "courtesy overdraft." These programs allow the banks to approve over-limit transactions and charge you $30 or more for each one.

True overdraft, by contrast, links your checking account to another of your own accounts: typically a savings account, line of credit or credit card. If your transaction exceeds your balance, the money is drawn from one of these accounts. You'll pay an annual fee of around $50 and possibly a $10-per-transaction fee, but the costs for making a mistake will be substantially lower than under bounce protection.

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If the bank won't approve you for true overdraft, ask it to stop approving over-limit transactions. If it won't, take your business elsewhere.

Q: Do you recommend taking funds from a money market account to pay off high-interest credit cards? We are ages 57 and 60. One of us is retired and one is still employed.

A: The answer to this question is more complicated than you might think.

All things being equal, it makes sense to use cash in a low-interest money market account to pay off much higher-rate debt.

You may be taking a big risk if the money is all the cash you have in the world and paying the debt would wipe out this emergency fund. Just in case, you may want to use only a portion of your cash to pay down the debt and pay the rest off out of your current income.

You'll also want to examine why you got into credit card debt in the first place.

Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at www.asklizweston.com .

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