Avoid Being Charged Overdraft Fees

If your checking account shows a negative balance, your financial institution can penalize you with a charge known as an overdraft fee. Such a fee can be expensive and frustrating. [1] This article discusses several ways to prevent overdraft fees from occurring.

Steps

Eliminating Overdraft Charges

  1. Select an overdraft option. Your bank may offer a service that limits or completely eliminates overdraft fees. Typically you have three such options:
    • Overdraft coverage: a limited coverage in which the bank will honor a check that pulls your balance below zero, anticipating that you will reimburse them in the immediate future.
    • Overdraft protection: the bank will automatically withdraw funds from another of your accounts or grant you a line of credit in the event of an overdraft. A line of credit typically involves interest payments and transaction fees.
    • Complete opt-out: you're under no obligation to have any overdraft protection at all. If you opt out, one or more of your checks could be rejected. In such a case you might be charged an overdraft fee.
  2. Ask to have an overdraft charge eliminated. If you very rarely overdraw an account you've maintained for a long time, approach a customer-service representative about having the overdraft fee removed. Many banks will waive such a fee for normally reliable customers.
  3. Negotiate if you have a series of overdraft charges. Your bank may consider waiving a series of charges stemming from the same overdraft if you're willing to set up a savings account for automatic overdraft protection. As an added incentive you could offer to accept other services with the bank in exchange for eliminating the fees.

Maintaining Your Account Balance

  1. Avoid relying on your "available balance." It's tempting to accept the "available balance" shown on your ATM receipt. However, that figure does not reflect checks that haven't yet been presented for payment ("outstanding" checks) or bank card purchases that haven't been processed yet. You may also have some automatic payments that will occur within the next few days.
  2. Keep your check register up to date. The best way to ascertain your available balance is to keep your check register up to date. Immediately record every transaction so that you have an accurate record of checks that will soon be presented for payment. That will let you know how much money you have available.
    • Find out if your bank or credit union has an app to help you maintain your check register. [2]
    • Check with your bank about online services. Many banks offer a portfolio of services to help their customers manage money.
    • If you prefer managing your register on paper, do it consistently so that you know that your available balance is accurate.
  3. Balance your checkbook. A pending overdraft fee may indicate that you haven't balanced your checkbook lately. Do this regularly in search of arithmetical errors or failure to record transactions.
  4. Include bank card purchases in your register. If you occasionally make bank card purchases, be sure to note them in your register. Such purchases, like checks, often take a few days to clear.
  5. Remember that deposited checks, including paychecks, take time to post to your account. It's best to wait a day or two before drawing on those deposits. (The bank can tell you when those funds will be available for use.)

Managing Your Money

  1. Try the envelope system. One way to avoid overdraft fees is to use mainly cash in your transactions. You can do that and stay within budget by using the envelope system.[3]
    • Take several envelopes and label them according to budget items (gasoline, eating out, groceries, etc.).
    • At the beginning of the month take out cash from your account and put the amount that's budgeted for each expense item in the envelope with the appropriate label. For example, if you've budgeted $100 for gasoline for the month, put $100 in the envelope labeled "gasoline."
    • When you want to buy something within your budget, do so by pulling the cash out of the appropriate envelope. If it's time to spend $20 for gasoline, pull $20 out of that envelope and use it to pay for your fuel.
  2. Create an artificial buffer. Give yourself a cushion in the event something goes wrong or you make an error when balancing your checkbook. Set a lower limit for your balance, and never let it fall below that. For example, you might prefer never to let your account fall below $100 (perhaps $500 if you write a lot of checks or often write big checks). [4]
    • Some accounts require a minimum balance to avoid fees. Fees for going below a minimum balance are generally smaller than overdraft fees, but they are still an unnecessary expense. Ask your bank or credit union if they have such fees, and what their requirements are for your minimum balance.
    • If you're trying to build up savings, maintain your own minimum balance (above whatever the bank requires), and raise that minimum every month. Besides creating your own insurance against overdraft fees, you'll also be providing a Prepare for a Recession, which can help you avoid going into debt in case of a financial emergency or unexpected expense.
  3. Ask about your bank's policy regarding deposits and payments. Some banks will process payments prior to processing deposits. That means if you have a deposit and a payment on the same day, your account could drop below zero if the payment is processed before the deposit. Understand the policy, and schedule your payments accordingly.
  4. Look into your bank's policy regarding the crediting of deposits. You might find that corporate paychecks clear sooner than handwritten checks do. Familiarize yourself with the bank's policies about how long it takes certain checks to clear, so that you know when you can expect the money to be credited to your account.

Tips

  • Join a credit union. Fees charged by credit unions are typically lower than those of a bank, and sometimes a credit union will reduce or remove a fee at your request if your account is generally in good standing.
  • It's important to remember that overdraft fees are intentionally high in order to encourage people not to overdraw their accounts. When a bank pays an item for which there is not sufficient funds, the company is gambling that you will reimburse them. It's really just a courtesy to you.
  • If your bank offers a balance-notification service, use it. This goes along with the buffer concept: whenever your balance gets down to a critical level, stop spending. It might take some trial and error before you can settle on the proper critical amount.
  • Understand the fee structure. Each bank has policies enforced by federal law as well as guidelines of its own. When you open an account, be sure to ask about the fees associated with it, including overdraft fees.
  • Recent legislation prohibits overdraft fees so excessive as to be considered usury (charging illegally high interest rates). You may be able to contest fees that go beyond what is permitted by law.
  • Access your paycheck early. If you're facing the possibility of an overdraft, ask your employer to pay you for work completed even if it's not yet payday. It's better to make an early deposit than to pay an overdraft fee.

Warnings

  • Automatic payments and transfers can be a convenient way to avoid missing monthly bills. However, if you set up such payments, make sure you record them in your register, and be sure there is money in the account to cover them. If you're not sure, set a regular reminder in your calendar or phone, and make a point to deal with your payments promptly.
  • Fighting with the bank teller and refusing to pay your overdraft charges is not a way out of this situation. Those people are just doing their jobs. You won't make any headway by being belligerent.
  • Overdrafts can impact your credit history. A governing system among U.S. banks, known as Chex Systems, monitors account holders. Any customer who leaves a negative balance in his or her account for more than 60 days is automatically charged off and reported. Your account will be closed, you'll still owe the bank money, and it could take you up to five years to re-establish credit before another bank will work with you. Overdrafts are a serious matter.

Related Articles

Sources and Citations

  1. ↑ http://www.usatoday.com/money/perfi/basics/2008-06-17-bank-fees_N.htm
  2. ↑ http://iphone.appstorm.net/roundups/finance-roundups/30-personal-finance-apps-for-the-iphone/
  3. ↑ http://www.daveramsey.com/etc/cms/index.cfm?intContentID=3461
  4. ↑ http://www.getrichslowly.org/blog/2008/06/24/how-to-avoid-overdraft-fees/
Retrieved from "https://kipkis.com/index.php?title=Avoid_Being_Charged_Overdraft_Fees&oldid=302873"