Life can get expensive. From budgeting for grocery and utility bills to managing student loan debt and mortgage payments, it may seem as if you can never get on top of your finances. With so many expenses to keep track of, it can become easy to fall behind and end up with no money in your checking account and not even realize it.
So, what happens if you go to the store and buy something with money you don’t have? Your bank may cover the extra costs to help complete your payment, but not without asking for money in return. When you withdraw more money than you have in your account and your bank has to foot the bill, they may charge you an overdraft fee, which can send you further into debt than you expected.
Whether you’re living paycheck to paycheck or forgot to transfer money over to your checking account before making a large purchase, it’s important to know what happens if you withdraw more money than you have, and how you can fend off overdraft fees in the future. To help you avoid an unnecessary bill, we’ve created this guide on how to get out of overdraft fees. Below, you’ll find tips on steering clear of overdraft charges, so you can keep your financial health and checking account in tip-top shape.
What are overdraft fees?
An overdraft fee is when you make a withdrawal that exceeds your available balance, or the amount of money you have saved in your checking account. When this happens, your bank can cover the additional amount you owe, but may charge you an overdraft fee in the process.
For example, let’s say you have 5 dollars in your checking account, and you go grocery shopping and spend 55 dollars on food and other items. This means you will have a balance of negative 50 dollars on your account. When you overdraw funds, your bank may allow you to continue with your transaction instead of declining your card. However, when this happens, you may notice an overdraft fee on your monthly bank statement.
But overdraft fees don’t just impact larger sums of money like you might expect. According to data from the Consumer Financial Protection Bureau, the average overdraft fee is incurred on transactions less than 24 dollars.
It’s also worth noting that you may be hit with multiple overdraft fees in one day if you continue to make purchases with insufficient funds. The Center for Responsible Lending’s report Unfair Market: The State of High-Cost Overdraft Practices in 2017 compared the practices of the top ten national banks by their assets.
For example, Capital One charges a 35 dollar overdraft fee and can charge you up to four times a day for overdrawing your account. Multiple overdrafts can add up to 140 dollars a day if you continue to spend while in the red. The daily limit for overdrawn fees varies by bank, so make sure you know your limit just in case you accidentally make multiple transactions with insufficient funds.
Each year, banks charge Americans billions of dollars in overdraft fees. In a report conducted by the Consumer Financial Protection Bureau, in 2015 alone, banks who reported overdraft and NSF fee revenues collected 11.16 billion dollars in revenue. Additionally, another report by the Consumer Financial Protection Bureau found that only 8 percent of American customers are responsible for nearly 75 percent of all overdraft fees. If you’re prone to overdrawing on your account, or you’ve accidentally overdrawn and don’t want it to happen again, keep reading for tips on how to avoid overdraft fees below.
How to avoid overdraft fees
Overdraft fees can send you into debt, and some mistakes when paying off debt include being misinformed and not budgeting correctly. Without knowing your bank’s overdraft protection program guidelines or budgeting correctly to avoid slipping under your balance, you may find yourself with some pretty hefty overdraft fees. To avoid these charges, take a look at these eight ways on how to get out of overdraft fees.
1. Enroll in automated payments
Sometimes, when you make a deposit into your bank account, the funds won’t be present right away. Some consumers don’t know this, which may lead them to think they have money in their account when in actuality they don’t because the funds have not been processed by the bank yet. This could create the false appearance that you have enough money in your account, but if the deposit wasn’t cleared and you make a transaction that exceeds your account value, you can wind up with an overdraft fee.
One consideration you can make to avoid overdraft fees is by enrolling in automated payments. Some utility companies, loan providers, and insurance companies may allow you to set up automated payments where you can schedule when money can be deducted from your account.
Enrolling in automated payments can limit the number of checks you have to write each month, which may reduce the likelihood of overdrawing. With a clear understanding of when money will be taken out of your account for expensive payments like bills and utilities, you can prepare a more accurate budget to ensure you don’t overspend.
2. Sign up for alerts
Another reason you may be hit with an overdraft fee is by simply forgetting where your checking account stands. Life gets in the way, and it can become easy to get caught up in daily occurrences and forget to transfer money from a savings account to a checking account. Most banks can send you alerts when your account balance is running low through their mobile app, email, or text messages.
3. Opt out of overdraft protection
FDIC.gov explains how opting out of overdraft protection can prevent your bank from charging an overdraft fee the next time you take out more money than there is in your bank account. In 2010, the federal banking regulators implemented a rule that banks must receive consent from their customers if they want to opt-in to their overdraft protection program. If a customer opts-in to their bank’s overdraft protection program, they agree that they can be charged an overdraft fee if they make a transaction that exceeds their account balance.
However, if a customer decides to opt-out of their bank’s overdraft protection program, their bank will decline their transaction at a point-of-sale (POS) system or ATM. So, if you’re looking for ways to stop overdraft fees, opt out of your overdraft protection program.
4. Keep an eye on your accounts
Keeping a watchful eye on your bank accounts is another way you can prevent a negative balance on your account. Before you write a check, withdraw money from an ATM, or buy something online or at a store, take a look at your bank account and ask yourself:
- Do I have enough money to make the purchase?
- Are there any transactions listed as “pending” that may result in an overdraft?
If so, transferring money to your checking account or simply not making a transaction can help prevent an overdraft fee.
5. Create a cash cushion
There’s a time and place for living life on the edge. But when it comes to your finances, it’s best to stay grounded. Instead of leaving a few dollars in your bank account each month, make an effort to never dip below 100 dollars or even 50 dollars. Treating 100 dollars as zero is one way you can ensure you have enough money to cover certain expenses and avoid an overdraft fee.
6. Connect your checking and savings accounts
Another consideration on how to stop overdraft charges is connecting your savings account to your checking account. This way, if you go under your account balance on your checking account, money from your savings account will be transferred over to your checking account to cover the remaining costs. Just make sure you have enough money in your savings account to cover any additional costs.
7. Use your debit card wisely
When shopping, using your debit card wisely can help you prevent getting charged an overdraft fee. Small payments can add up before you know it, and if you don’t accurately calculate each payment, even if it’s only a few dollars, you may end up overdrawing money. Instead, consider purchasing a prepaid debit card or secure credit card. These cards have set spending limits and are not connected to your bank account, which can help you avoid excess fees, including overdraft charges.
8. Switch banks
A final measure you can consider taking is switching banks. Some banks have more expensive overdraft fees than others, so if you find yourself continually overdrawing, you want to consider switching to a bank with a lower overdraft fee to avoid this charge.
However, it’s best to take control of your spending to avoid accumulating these fees by creating a budget, getting credit card debt relief if needed, or talking to a financial adviser.
Key takeaways on how to avoid overdraft fees
Equipping yourself with knowledge on how to stop overdraft fees can help you make smart financial decisions that won’t push you further and further into debt. When you make a transaction that withdraws more money than you have in your account, your bank can charge you one of these pricey overdraft fees.
Therefore, doing your best to keep an eye on your bank account balances, setting up automatic payments, and signing up for bank alerts may help you avoid overdraft charges.