How to Avoid Overdraft Fees
Overdraft fees – everyone’s least favorite fee. Of course no one likes any type of fee, but overdraft fees always hurt the worst. You’ll be charged an overdraft fee when you make a transaction for more money than is in your bank account. Each transaction that puts you in the negative will incur a fee, and if your account stays in the red for too long, you’ll be subject to a recurring overdraft fee as well.
The average overdraft fee at most banks is around $34 per overdraft item. It’s a slippery slope and you could very quickly end up owing your bank over $100.
Let’s look at overdraft fees and the best ways to avoid them.
What is an Overdraft Fee
Before I began my current career, I worked at a fairly large bank. Nearly every day a client came in to complain about an overdraft fee and request a refund. But should the bank be allowed to charge the fee?
Absolutely, 100% yes. But why is that?
Let’s look at this from the perspective of the bank. Someone who has an account with you tries to spend more money than they have in their account. But instead of denying the purchase, you decide to loan your client the extra money they need to complete their purchase.
But you’re not going to give them money for free, are you? It’s a loan, and like any other loan, you expect the client will pay back the amount you lent them with interest. But since it’s supposed to be a short-term loan that and you expect to be paid back quickly, so you charge a flat fee instead of a percentage of the balance like you would with a loan over a long period of time.
When you look at it as a loan, it makes more sense as to why the bank charges you a fee. It’s a service that’s being provided to you.
So how do I avoid them?
1. Keep track of your account balance
This one might seem obvious, but the easiest way to avoid overdraft fees is to know what is in your bank account. With the prevalence of online and mobile banking, your account balance is at your fingertips every second of the day. Download your bank’s mobile app to your phone. Right now.
Understanding what you have in your account right now and what bills you have to pay is the biggest step you can take. You’ll also want to know when any automatic payments will be withdrawn from your account.
It’s easy to lose track. We’ve all done it. Thought you had the money but something else came out that you forgot about and now you’re overdrawn. Check your balance before you go shopping.
2. Opt out of overdraft services
Opening a bank account can involve lots of paperwork that no one wants to read. One of the things that most people sign off on without reading is consenting to overdraft services on debit card transactions.
What this means is that when you use your debit card to make a purchase and you don’t have enough money in your account, your bank can choose whether or not to allow you to make the purchase. Essentially the bank loans you the money you don’t have so you can still purchase whatever you’re attempting to buy.
According to the Consumer Finance Protection Bureau (CFPB), the majority of overdraft fees are a result of debit card transactions.
Now they don’t honor every purchase. There’s a complex formula that the bank uses to determine whether or not they will cover the cost of your purchase.
You can opt-in or out of this service at any time. You can choose to have the bank decline the purchase instead of allowing you to overdraw your account. No overdraft, no overdraft fees.
3. Sign up for overdraft protection
Banks offer a few different products and services as protection to help you avoid overdraft fees.
The first option is to apply for an overdraft line of credit. This is a line of credit just like a credit card or a home equity line of credit (HELOC), and you can take money from your line of credit, pay it back, and use it again. Some banks offer a specific line of credit product to be linked to your checking account as overdraft protection, and others allow you to select any of their line of credit products for this purpose.
There is typically a fee to automatically withdraw the funds from the line of credit to cover your purchase, but it’s significantly lower than the standard overdraft fee. The average fee for this type of overdraft protection is roughly $10. However, if you know you’ll need to utilize your line of credit to cover the purchase, you can manually transfer funds from the line into your checking account ahead of time and avoid this fee too.
The second option is linking a savings account for overdraft protection. It works the same way as the line of credit. You make a purchase that exceeds the balance of your checking account and the bank will automatically transfer the amount you need from the savings account. Many banks charge a $10 fee for this just like with the line of credit, however recently some banks are getting rid of this fee, allowing you to use this service free of charge. Of course if your bank does charge a fee to use your savings account, you can always transfer the money ahead of time and avoid the fee.
4. Set up alerts for low balances
Most banks online banking and mobile banking platforms allow you to sent up email or text alerts if your balance falls below a certain amount. Knowing your account balance is low can help you monitor your purchases to ensure you don’t spend more than you have.
Many budgeting apps also have a email/text alert feature that you can utilize. These apps allow you to set up alerts both for low balances, but also for nearing your spending limit for each category of your budget.
5. Transfer money into the account
If you can transfer money into your overdrawn account quickly, you may be able to avoid an overdraft fee. Check with your bank to see if they have a cutoff time for putting the money back into your account. It’s by no means a fool-proof method, but depending on your bank could potentially work in your favor.
Worst case scenario, even if you miss the deadline, adding the funds back into the account ASAP can help you avoid further fees down the road. Each transaction you make that puts your account deeper into the red will incur a $34 overdraft fee. And if your account stays negative for multiple days, your bank will begin charging a recurring overdraft fee.
Moral of the Story
The only surefire way to make sure you don’t get hit with an overdraft fee is not to overdraw your account.
Are you making purchases you don’t need? Are you not paying attention to your account? Did you forget about the automatic payment you set up?
It’s important to know what’s going on in your bank account and what you’re spending. If you need some help with tracking your spending, check out our favorite budgeting apps.
Related: The Best Budgeting Apps