Overdraft fees are annoying and expensive! There is nothing worse than being penalized for a careless mistake. The good news is, they are also preventable. Listed below are 15 ways you can avoid dreaded overdraft fees:
Most banks allow you to set a low balance threshold that will alert via text or email when your balance falls below a specified amount. Unfortunately, the alerts aren’t transmitted in real-time so this method is best used in conjunction with…
Set a buffer for yourself and treat that amount as 0. For example, if you set a buffer of $100, when you see $150 in the account, you tell yourself you only have $50 available to spend. The goal is to never dip below your set buffer. It takes some discipline to trick your mind into “seeing” your buffer as zero, but if you can do this you will have wiggle room in your account.
Make a budget and stick to it. A budget does NOT have to be complicated. Create 2 columns: Income & Expenses. Make sure the INCOME column is LESS THAN the EXPENSES column.
4. Cash System
Using a cash only system, such as the envelop method, will ensure you don’t overdraft because you are only spending cash on hand. Some people find it harder to track their spending using cash, others report being more resourceful because of the tangible impact of money leaving their hand. This is a good method, but isn’t fit for everyone.
5. Opt Out of Overdraft Service
If you opened your bank account before 2009/2010, you were most likely immediately enrolled in your banks Overdraft “service” and subject to all fees if you elected to take advantage of this service. At $20-$30 per overdraft, do you think we should have some say in rather we want this “service”. Lawmakers thought so, and now Overdraft services are opt-in. However, that does nothing for older accounts. If you don’t want to use the overdraft service, you can manually opt-out.
This means if you run don’t have the funds to cover a purchase, you will be denied at the counter. Being denied now, or a $20-$30 fee later? Only you can decide for yourself which is more of an inconvenience.
6. Balance Your Account
Many people shy away from the idea of balancing their checkbook or account, but using a ROUND UP method makes it easy. This way you don’t have to add cents. Always round up, even if it is a penny over – your account will not be balanced to the penny, but you WILL create an extra buffer.
You can do this 2 ways:
Non-technical way: Attach a post-it note to your debit card. IMMEDIATELY after you make a purchase, record the rounded amount. At the end of the day or week, reconcile the amounts
Technical way: Use a note-taking app on your Smartphone to record your rounded-up amounts
Example: I spend $5.73 for lunch, then on the way back to work I fill up and spend $23.04 gas. My entries would be
These numbers are much more manageable.
7. Overdraft Protection vs. Overdraft Service
Some banks offer Overdraft protection. This is an opt-in service where the bank will transfer money from a linked account (usually savings account) to cover the overdraft. There is typically a transfer fee that can be half or a third of what the overdraft service would charge. While it’s better than the service charge, personally, I don’t like the idea of being charged to spend my own money!
8. Communicate with any Joint Account Holders
If you are not the only drawer on an account, it is crucial to keep an open line of communication open with anybody who holds a card or the ability to withdraw funds. Set a spending policy, discuss major purchases, and reconcile spending routinely to avoid unexpected service fees.
9. Reduce the amount of subscriptions and automatic payments
The dangerous thing about subscriptions and automatic payments is the set it and forget it mentality. This is especially true of annual payments. Evaluate your subscriptions – first, are you still using it? If not, get rid of it altogether! If it is a valid description, can it be paid manually?
Automatic bill payments are a great convenience, but can make us financially lethargic. Manually pay your variable bills so you know exactly what is coming out of your account.
10. Know your ATM Fees
If you use an ATM that does not belong to your bank’s network, you get penalized TWICE (I’m sure it’s called a convenience fee…but it doesn’t fee convenient). Rates can be as high as $3 for not using an ATM owned by your bank and another $3 by the servicing ATM. So that $20 w/d, just cost $26. If you frequent ATMs, not only are you being eaten alive in fees, but your chances of over drafting increase if you don’t track these additional charges.
If you must use an ATM:
- Consolidate withdrawals since fees are not based on amount
- Whenever possible, try to visit an ATM that belongs to your bank
If you are a heavy ATM user, you may want to find a bank that refunds ATM fees
11. Don’t try to race the account clock
This is a gamble and it’s not worth the risk. If you KNOW the money isn’t in your account – do not make the purchase. If you decide to make the purchase under the assumption that you can deposit the money before the purchase posts to your account you are playing with fire. Sometimes it may work, sometimes it won’t – either way, it is an irresponsible way to handle finances.
12. Watch out for holds
If you look closely at your statement after pumping gas, it may say $1. This is a hold until the actual amount is reported. This happens often at gas stations and also if paying for hotels and rental cars with debit cards. Any miscellaneous security deposit or lagging payment will make your balance seem larger than it is. This leads to a false sense of financial security. This is why it is important to balance the account for yourself.
13. Don’t trust the available balance
This balance is NOT a real time balance on your account. Small businesses, vendors, and medical billing facilities typically run credit/debit payments at night. A variety of businesses take 2-3 days to post to your account. Blindly relying on the available balance reported online or through the phone service does not give an accurate amount.
14. Transfer Funds Immediately
While you should not intentionally try to beat the clock (see #11). If you are fortunately enough to realize you made an error, transfer funds or make a cash deposit immediately. If you have multiple phones and a smart phone app, you may be able to transfer the phones instantaneously. You may be lucky enough to get funds in the account in time. If not, you have leverage for when you ask to get the overdraft fee waived.
15. Link to a Line of Credit
Similar to overdraft protection, except instead of linking to another bank account and being charged a transfer fee, the overage is linked to a credit card. Typically the fee is significantly less (a small finance charge percentage). Depending on how you feel about credit cards and your eligibility, this may be a viable option.
16. Don’t Forget About Outstanding Checks
I wasn’t going to include this one because people that write checks typically balance their checkbook. But I figured it was worth including…especially for the sporadic check writer. Make sure to account for money allocated via check.
These aren’t really avoidance, but could save you money in the long run:
Know Your Bank’s Policy: Some banks have steep overdraft fees. Because of recent laws, many financial institutions have become more “friendly”. For example, 1 bank now only charges for 4 overdraft fees in a day…but their fee is $35. That is potentially $140 in fees! Some institutions will not charge a fee if the overdraft is less than a certain amount (typically $5 or $10).
Get it Refunded: Mistakes happen! Banks understand this, and as long as you do not have a history of overdraft fees, chances are you can get that bank fee refunded. Figure out where you went wrong, implement changes and learn from your mistake.
Some of the methods above are better than others. Personally, I use a 3-fail method of:
Balancing the account
What about you?
What methods do you use?
Are there any I forgot to include?