Overdraft fees are the fees banks charge when you spend more than you have available in your checking account. But it comes at a great cost. The average overdraft fee is approximately $35 and some banks charge a daily fee until your account balance is positive again.
According to the Consumer Financial Protection Bureau (CFPB), banks earn approximately $17 billion annually from overdraft fees and insufficient funds fees. And these fees most hurt vulnerable populations who are more likely to overdraft frequently.
In theory, avoiding overdraft fees should be as simple as not spending more than you have in your account, but it’s not always that easy. Thanks to the growing use of modern technology to move money, many people now have money coming and going from their account throughout the month – direct deposit paychecks, bills on autopay, payments to and from friends through apps like Venmo and PayPal, etc.
With so much to keep track of, it’s often difficult to know exactly how much you have available, which can make it incredibly easy to overdraft your account. Thankfully, there are a few simple ways to avoid overdraft fees.
1. Opt Out of Overdraft Protection
Banks provide overdraft protection so that even if you don’t have sufficient funds in your account, you can make a purchase without being declined. While there are benefits to this service, if you’re consistently being charged fees, it may not be worth it. The good news is that overdraft protection plans are optional, which means you have the ability to opt out. If you choose to opt out, when you attempt to make a purchase and you have insufficient funds, the purchase will be declined.
Before opting out of an overdraft protection plan, you’ll want to check your bank’s policy on declined purchases. Some banks charge a fee, often known as an non-sufficient funds (NSF) fee, when a purchase is declined. If your bank charges for declined purchases, opting out of the overdraft protection plan may not save you any money.
2. Link a Credit Card or Savings Account
Depending on your bank and the type of account you have, your options may not be limited to having a purchase declined (and potentially paying a fee) or overdrafting your account (and paying a fee). Some banks allow you to link a savings account or credit card to your checking account. When you spend more than the available balance in your account, the remaining funds will be taken from the savings account or put on the credit card.
Linking a credit card or savings account may save you from paying overdraft or non-sufficient fund fees, but it should also be used cautiously. When you know that you have access to more money it can be easy to spend more than you need. If you think you’re the type of person who may find a linked credit card too tempting, linking a savings account may be a better option.
3. Know Your Balance
One of the reasons it’s so easy to overdraft your account is that you may misunderstand how much you have available. Let’s say you want to make a $75 purchase but aren’t sure you have enough money in your checking account. So, you log into your bank’s mobile app and check your balance. You see that you have $150… more than enough to cover your purchase. You go ahead and make the purchase, but the next time you login to your account you see you were charged an overdraft fee. What happened?
The problem is that your actual balance and your available balance aren’t always the same thing. Your actual balance is the amount of money sitting in your account. It may not include pending transactions or checks you wrote that are still outstanding. On the other hand, your available balance is how much money you have available to spend and includes holds on your account, such as a debit card transaction that hasn’t posted yet. This is why even though your balance may show that you have enough money, you may still end up overdrafting your account.
4. Track Your Transactions
Tracking all your transactions may not sound like the simplest option, but with so many different apps that can help, it’s actually fairly easy. The benefit of tracking your transactions is that it can provide you with more information than simply checking your balance. Tracking your transactions includes keeping up with when bills set on autopay come out of your account, how long it takes certain transactions to post, etc.
5. Set Up Low Balance Notifications
Another way to use technology to your benefit is to set up low balance notifications. This allows you to receive an automated notification any time your account drops below a certain amount. For example, you could choose to receive an email or text message any time the balance of your account drops below $100, though the alert amount you choose is up to you. This is an incredibly simple way to avoid spending more than you have in your account and avoid overdraft fees. The exact steps for setting up low balance notifications will depend on your bank, but can usually be completed in under a couple of minutes through online banking or through your mobile app.
6. Keep A Checking Account Cushion
Not everyone has the ability to leave money in their account, but if you do, it’s a great way to help avoid overdrafting your account. For example, you may choose to leave $100 in your checking account as a cushion. This way, even if you accidentally spend more than you realize, you won’t end up with overdraft fees. If you choose to do this and at any point you dip into the cushion, either accidentally or on purpose, you’ll want to replenish that amount as soon as you’re able. If $100 is too much, smaller amounts, such as $50 or even $25 may also help. The idea is to avoid bringing your account balance down to zero unless absolutely necessary.
7. Find A Bank Without Overdraft Fees
Finally, one of the simplest ways to avoid overdraft fees is to open an account with a bank that doesn’t charge them. These banks aren’t always easy to find, but they do exist. Three great options are Chime, SoFi Money, and Varo Bank.
Overdraft fees can be a drain to your financial health, but managing these fees doesn’t have to be complicated. And you can do it with any budget or account balance. Basic precautions such as checking your account balance and setting up account alerts can help you avoid the majority of instances where overdraft fees kick in. Perhaps the best way to avoid overdraft fees is to open an account with a bank that does not charge such fees.
Knowing how you spend your money is a trait that will save you thousands over your lifetime.