A few weeks ago, I watched a show on HBO called Maxed Out: Hard Times, Easy Credit, and the Era of Predatory Lenders. As someone who believes strongly in both free markets and personal responsibility, I have a problem with blaming the banks who lend money but not the people who borrow money foolishly. While I expected the show to slam banks (and they did plenty of that), it also showed a lot of ways people get themselves in bad financial situations so that people can learn how to avoid being put in a situation where those evil banks can take advantage of you. Credit card companies’ favorite customers are people who have already declared bankruptcy. They know that these people can’t declare bankruptcy again for 7 years, and they have already shown that they have a “taste for credit,” meaning that they’re willing to buy something and make minimum payments forever.

The very next day, a communications student was roaming the halls of the economics department looking for someone to be interviewed on camera about bank overdraft charges. During summer, there’s hardly anybody around and he wasn’t having much luck. He said it was just for an assignment and it wouldn’t be televised, so I said I’d help him out and did some research into bank fees for the interview. Banks took major hits in the last two years with people defaulting on both home loans and credit cards, so in addition to begging for TARP money, they’ve raised fees on everything they possibly can.

Both of those events had me thinking about bank and credit card fees and how people can avoid being taken advantage of, and I have been meaning to write this post for a few weeks now but I felt I needed one more piece of information. That information arrived yesterday when I learned that, in the past year, banks collected $38.5 billion in overdraft charges. That’s over $150 per adult in our economy. Obscene. (Normally when I talk about a person’s or a firm’s income, I say something more like, “Company X earned $Y in profit last year.” But there’s not much ”earned” about these overdraft charges. )

Most of my students have grown up in a world where credit cards and debit cards have been the standard form of payment, but that’s not how it used to be. Two decades ago, you paid by cash or check. If you wrote a check for more than you had in your checking account, it bounced. The bank charged you a fee and the store charged you another fee.

Somewhere in the last decade or so, things changed. First, stores can have checks approved electronically, so you can’t really bounce a check any more. Second, people have begun using debit cards much more frequently. Third, banks decided to offer their customers “overdraft protection,” where banks would honor a transaction even though you had insufficient funds for it, mark your account as overdrawn and charge you an overdraft fee. Normally I wouldn’t have a problem with that. To some, it would seem that the bank is just providing you insurance against bad record-keeping and you’re paying a price so that you can have the things you want even if you didn’t have the money for it that day. But there are two practices many banks employ that make me cry foul. The first is that some do not give you the option of overdraft coverage: they require it on their checking accounts. The second is that they will allow you to go over your account limit several times and charge you every single time.

You should have the option to not have overdraft coverage. In cases where you do have it, banks call it ”overdraft protection” to trick you into thinking it’s a wonderful thing, and most consumers don’t know any better. I know when I was a college student I thought it was a good thing. Then again, I was just so happy they gave me a card that I didn’t bother with the details. I would encourage readers to find out if they have overdraft protection on their accounts and, if you can, have it removed. If you have no overdraft protection, then when you try to use your debit card to buy $10 worth of goods and only have $5 in the bank, the bank will just deny that transaction and you walk away from the store with no goods but you save yourself $26, the average overdraft charge. (Most credit card companies do this as well — allowing you to go over your credit limit and then slamming you with an overlimit fee. You should try to get that removed as well.) Maybe you’re a little embarrassed, but you didn’t get hit with a fee. And you’re aware of it right then, instead of blindly making several more transactions that day and the next (and getting charged an additional fee with every single one of them) until at some point you look at your statement and finally realize what’s happened.

The rise in overdraft fees is due not only to banks increasing their fees, but also consumers not keeping track of the money they spend. People with smartphones can often download free apps for their bank that will give them up-to-date account balance information. I got one for my Wells Fargo account and it’s great. I don’t use my debit card for anything other than my trips Costco, but I check my account with my iPhone before I go in to make sure I don’t spend too much. If you are in the habit of using your debit card for every little purchase you make, look into downloading one of these free applications. If you don’t have a smartphone, please at least be more careful about keeping track of the purchases you make or try to remove your overdraft coverage.

This recession is waking a lot of people up to the idea that you are not entitled to spend beyond your means and you have to be smarter about the financial decisions you make. But this report of $38.5 billion in overdraft fees tells me that not enough people are waking up yet. Your tax dollars are already going to many of these banks via the TARP program. Don’t give them any more money in overdraft fees.