We hate bank overdraft fees. But according to the Consumer Financial Protection Bureau, there are consumers who (individually!) pay almost $450 each year in overdraft fees! For some families that’s groceries for a month. It’s rent for others. It’s spending money. There are a number of ways you could spend $450 that would be better than handing it over to the bank for overdraft fees.
For some people, overdraft fees are a lifesaver. If you’ve ever been just a few days away from payday and out of money, you may have swiped your debit card knowing you can’t fully cover a charge, but expecting your direct deposit will cover the negative balance. Think about how much better off you’d be if you could have your whole paycheck rather than sinking some or all of it into a negative balance.
While banks sometimes set you up for overdrafting – for example, by processing the biggest transactions first – there are some ways you can avoid overdraft fees.
Link your checking account to a savings account.
Many banks let you link to a savings account for overdraft protection. Rather than overdrafting your account, the bank will transfer funds from your linked account to cover your transactions. Most banks will charge a fee for this transfer, but it’s typically less than the overdraft fee ($12 vs. $36, for example). Having a lump sum transferred from your savings account will keep you from being charged multiple overdraft fees.
Avoid linking to a credit card for overdraft protection. Your credit card issuer will treat overdraft protection transfers as a cash advance. You’ll be charged a transaction fee of 5% or more, depending on your credit card terms. And because cash advance transactions typically have a higher interest rate and no grace period, there’s a chance you’ll have to pay interest on the transfer.
Transfer the money yourself when your balance gets low.
Rather than wait for the bank to make the overdraft transfer, initiate the transfer yourself and avoid the fee. Check your checking account balance often and transfer money from your savings account when your balance is low. If you end up not needing the money, you can transfer right back to your savings account.
Keep a buffer in your checking account.
Decide a good buffer amount $100, $500 or whatever you’re comfortable with. Then, make a personal rule that you won’t spend any money once your checking account reaches your buffer. As you approach your buffer zone, pull back on unnecessary spending until your next payday.
Of course, it can take some time to actually build up to that buffer. You can jumpstart it with a bonus or tax refund. Or, build up your buffer gradually month by month by easing your spending as your balance gets to $50, then $100, and so on until you have a comfortable buffer saved up.
Opt-out of overdraft transactions.
Overdraft fees are completely optional for debit card purchases. You can let you bank know you want to opt-out of overdraft transactions. Then, your bank would be required to decline debit card transactions that would cause you to overdraft. It might be a little inconvenient, but it would force you to stay more aware of your checking account balance. After all who wants to deal with the embarrassment having their debit card declined?!
Opting-out doesn’t apply to checks or online bill payments, though, so you’d still have to be careful about those.
Have your bank alert you when your balance is low.
It’s hard to remember to check your account each day, especially if you have a busy schedule. Many banks now have smartphone apps and allow you to set up low balance notifications. Once the app notifies you of a low balance, you can transfer money to your checking account or reduce spending spending until you have more money in your account.
Use a credit card for car rentals and hotel stays.
Many car rental agencies and hotels won’t take debit cards, but those that do, will place an authorization hold on $200 or more. That portion of your money often won’t be available until the transaction is fully processed. The authorization hold means your actual balance available for spending is actually lower than what’s actually in your account.
If you use a credit card instead, the authorization hold takes up your available credit not your checking account balance. You may still be able to use your debit card to pay your balance once you’ve returned the car or checked out of the hotel.
Practice good financial habits.
Your money management habits directly affect how you manage your checking account. Living by a budget and spending within your means are key to avoiding overdraft fees and to financial success.
Don’t try to rely on your memory to keep up with your checking account balance. You can quickly and easily verify what’s in your account by calling your bank or pulling up your balance online or via smartphone app. Don’t forget to factor in outstanding checks and any automatic payments you’ve set up.