By BankingMyWay.com Staff
Having your debit card rejected at the checkout counter at Macy's (Stock quote: M) would be pretty embarrassing. Then again, paying an extra $27 in fees just to avoid that embarrassment may seem like a pretty steep price, especially if it happens more than once.

The median overdraft fee, referred to as a non-sufficient funds, or NSF fee, in industry speak, was $27 in 2006, but ranged as high as $38 in some cases, according to a recent study by the FDIC.

While only a quarter of all consumer accounts incurred NSF fees in the 12-month period reviewed in the study, close to a third of those overdrawn accounts were charged 10 or more times. Overall, banks earned an estimated $1.97 billion in NSF-related fees in 2006.
So, how can you keep some of that cash in your account and out of your bank's profit column?

One option is to link your checking account with a second account, such as a savings account, credit card or line of credit. If you go to withdraw money that isn't there, the bank will automatically transfer funds from the linked account to cover the difference -- no embarrassment and no $27 fee. Problem is, this approach still allows you to spend money that you haven't already earmarked for this purpose.

For instance, by withdrawing the money from a savings account, you risk diverting funds that were intended for a specific savings goal, such as an emergency fund or a vacation. This kind of transfer ends up defeating the very purpose of setting up separate bank accounts. By linking your checking account to a credit card, however, you risk incurring interest charges and growing your balance. A line of credit isn't much better either: You'll start paying interest on the balance the moment the money is transferred.

So even if you avoid the NSF fees, overdraft protection could still end up costing you in terms of extra interest charges or a delay to your savings goals. Best advice: Treat your overdraft protection like an emergency safety net rather than a convenience offered by your bank. And if a trip to buy groceries at Safeway (Stock quote: SWY) or Whole Foods (Stock quote: WFMI) results in an NSF fee, consider it a warning that you need to pay closer attention to your finances.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.