Consumer Federation of California

The overdraft program on your debit card lets you, for example, buy a $3 latte at the local java joint even when your account is out of funds. Sounds like a nice perk from your bank, right? But it’s not, when you consider that your bank likely tacks on a fee–up to $35–whenever you spend more than you have in your account.

U.S. banks bring in nearly $30 billion in fees every year from overdraft programs and "nonsufficient fund" charges, according to a new report from the Consumer Financial Protection Bureau (PDF).

While you might welcome the benefits an overdraft program provides when you’re in a pickle and need to make a purchase, keep in mind that overdraft fees can compound. Some banks cap fees and/or don’t charge them for items that overdraw the account by less than $5, but others don’t cap fees, and some allow as many as 12 overdraft and nonsufficient fund fees in a day, according to the CFPB.

A 2010 class action against Wells Fargo in California, which resulted in an order that the bank pay $203 million in restitution to customers, highlights how overdraft fees can spin out of control. One plaintiff, Erin Walker, an 18-year-old who had just opened her first bank account, was charged $506 in fees over a one-week period for an overdraft of about $120. Wells Fargo did that in part by ordering her transactions so that most of them–purchases of about $4 to $5 at places such as Starbucks and Jamba Juice–were posted after larger purchases.

Federal regulations in 2010 forced banks to ask you to opt in for an overdraft program; most banks used to enroll customers automatically. Despite the new rules, the average consumer who overdrew an account in 2011 paid $225 in overdraft and nonsufficient fund charges, the CFPB the report says.

Overdraft programs are "really just a way for banks to bilk their most vulnerable customers with costly fees," says Pamela Banks, policy counsel for Consumers Union, the policy and advocacy arm of Consumer Reports. "Consumers should avoid opting in to these high-cost programs and consider cheaper alternatives to avoid overdrafts."

To avoid overdraft fees:

Decline overdraft services. If you’ve already signed up, contact your bank to opt out. Your debit card will be declined if you exceed your balance, but you won’t get hit with overdraft fees.

Link your accounts. Ask your bank to link your savings to your checking account for overdraft protection. You might get hit with a transfer fee, but it’s generally lower–about $5 to $10 per transaction or per day.

Get an overdraft line of credit. Any overdrafts will be covered by the line of credit. You won’t pay a bank fee, though they will incur interest. But that interest charge (14 to 15 percent APR at some banks) will probably be less than overdraft fees, provided you pay if off promptly.

Budget better. Sign up for e-mail or text alerts to know when your account balance falls to a certain level. Balance your checkbook regularly, and keep track of all checks you have written, debit transactions, automatic bill payments, and direct deposits.