Overdraft fees can easily send you into a spiral that can be difficult to stop. It can cost you hundreds of dollars every year.
And these overdraft fees are charged per item (debit card transaction or check) that comes in after you have a negative balance.
Depending on your bank’s policy they may pay the items drawing your balance into a bigger negative balance or they may return the checks causing you to face fees at the stores or businesses where you used your check.
This can create a cycle that is difficult to break because you start out each pay period in the negative.
Understand the True Costs of Overdraft Fees
First, it is important to understand the costs of overdraft fees. Many banks charge around $35.00 for each item that puts you into the overdraft (or more).
This is one of the ways that banks make money off their customers and why online banking is becoming more popular (many remove fees or offer some protection).
In addition to the charge per transaction, you will likely face interest charges on your negative balance or when you have “insufficient funds,” as well as a fee for each day that you are overdrawn.
If you have two items that overdraw you, you will then owe the bank an additional $70.00 on top of what you owe for the items that took your account into the negative.
Some banks will limit the number of items that they will allow to clear, but others do not allow you to rack up hundreds of dollars in fees in just a few months.
**Average overdraft fees rose 7.6% over the last six years and ATM fees have risen over 11% (Source)
How to Avoid Overdraft Fees
There are several steps that you can take to break the overdraft fees cycle and to make sure you never pay the fees at all.
It is important to be proactive in dealing with overdraft fees because it is much more difficult to stop the cycle once it begins.
Sign Up for Overdraft Protection
The first thing you can do to protect yourself from overdraft fees is to see if your bank offers an option to have a cash reserve account.
One option may be to link a savings account to your checking account.
The bank will pull money out of the savings account and will transfer it to your checking account to cover your negative balance.
There is generally a small fee of up to $5.00 for each transfer.
Another option for a cash reserve account is a line of credit that the bank will pull on to cover the overdraft.
Again with a small fee per transfer, but this also accrues interest similar to a credit card.
You will need to pay off the balance, but they often offer smaller monthly payment options.
Additionally, you may want to shop for a new bank account that offers more favorable overdraft protection options.
Two online banks you might want to consider that offer overdraft protection:
Avoiding Overdraft Fees by Monitoring Your Checking Account Balance
The most important thing you can do to avoid overdraft fees is you start to balance your checking account regularly.
Although balancing checkbooks may be a thing of the past for most people, you can still be proactive about what is in your accounts.
You can do this by keeping a record of your direct deposits, automatic withdrawals, checks, and debit card transactions to ensure your account balance has enough money and has sufficient funds for your needs.
- You can do this the old-fashioned way using a check register, which comes with your checks.
- Another option is to use banking software. Most budgeting software will connect with your bank automatically and download cleared transactions and allow you to schedule your automatic withdrawals so that they automatically show up in your register. You will need to enter the debit card transactions as you make them and any checks that you write. This is easy to do on your phone as you check out at the store.
Don’t Rely on the ATM Balance to Help You Prevent Overdraft Fees
Many people will check their current balance at the ATM or online and assume that they have enough money in their accounts to cover a specific purchase.
This does not work because the current available balance may not reflect things like upcoming automatic withdrawals.
Another issue is that when you use your debit card, that money is placed on hold with your bank temporarily.
This hold can sit in your bank balance for a few days until the store sends in the amount and it clears your account.
Sometimes this hold may drop off before the actual charge comes through. Typically, this scenario is more common with smaller businesses that may not run their debit card payments more than once or twice a week.
Breaking the Overdraft Cycle
If you have already overdrawn your account (or do so multiple times year), you may be trying to break out of the cycle so that you can avoid paying overdraft fees in the future.
Don’t be too hard on yourself, many people do this every year.
And considering banks collect billions of dollars a year in overdraft fees, you know it’s a common issue.
There are steps that you can take to help you bring your account back to a positive balance and avoid accruing any more overdraft fees.
1. First, you should set up a budget
A budget is simply a spending plan. This allows you to start spending your money with purpose and determine how much you are going to spend when.
This can also show you how much you have available to cover your bills, necessities (groceries and gas) and wants (eating out and entertainment costs) until you are caught up and have your account in the positive again.
It can also prevent you from running into this problem again. Start with a monthly budget and see if you need to refine further.
2. Second, you should talk to your bank and ask them for help
Often banks will waive one or two of the overdraft charges the first time it happens to you.
Can you get overdraft fees waived? Yes, you can. All you have to do is ask and present your case.
This is at the discretion of the customer service agent or bank manager and it helps to ask them humbly and explain how you are trying to solve the problem so that it does not happen again.
If you are overdrawn several hundred dollars, you can also talk to them about setting up a payment plan that will allow you to pay off the balance while still covering your basics like your rent and groceries.
Taking in your written budget can help you do this.
3. Third, switch to cash for spending
You may want to consider switching to cash for your discretionary spending until you have your situation under control. Avoid using your debit card if you are having issues keeping tabs of what is in your checking.
Now, this might difficult because most employers require direct deposit, but you may be able to ask for a check from your job or work out a plan with your bank to allow you to have some cash available to you.
4. Fourth, find extra money to pay down charges
Find ways to make extra money to help you quickly pay down the overdraft charge.
You can sell a few items that you have around the house collecting dust, work a few odd jobs or take on a part-time job in the evenings to help you bring your balance back into the positive.
Or even use a free app like Trim to help monitor bills and help negotiate fees for you. It won’t make you rich, but can free up some money to pay any fees and ensure you have some extra savings.
Prevent Overdrafts from Happening Again
Occasionally forgetting an automatic withdrawal may happen to anyone, but if you find that you are running close to a zero balance or overdrawing your account on a regular basis you may have bigger budget issues that may need to be addressed.
Your budget will help you determine if you are spending more money than you have every month.
Or it will help you see if you are just facing a cash flow issue like all of your bills being due at the beginning of the month, while you are paid monthly or weekly.
Your monthly budget can help you address this by setting aside money from each paycheck to help cover your bills.
Start Saving More Money to Avoid Overdraft Fees
An emergency fund is a great way to avoid overdraft fees.
You may also need to find more ways to save money and there are several ways that you can work to save money to help you avoid paying overdraft fees.
If you can lower your monthly expenses, it will be easier to stay on budget.
- Shop for new car insurance at least every year. You can often save money by switching to a new company. Also, you may qualify for better rates as you get older or as tickets and accidents are dropped from your record.
- Find ways to save on your utilities. There are several ways to do this including fixing the drafts from your windows, adjusting the thermostat or installing a smart thermostat that allows you to program your temperature to help you save money. Use Trim to help find lower rates and negotiate savings on your behalf.
- One of the biggest areas to save money is on your food bill each month. If you cook at home, you can save a significant amount of money. You can also save money on your groceries by creating a menu and a shopping list before you go shopping. This will cut down on the number of trips you take to the store each month and help eliminate some impulse purchases.
- Considering cutting your cable subscription. Choosing one or two streaming services can cut your cable bill nearly in half.
- Make more money! While saving on bills and lowering expenses will help, making more money will help you save and hopefully avoid overdraft fees. Ask for a raise, look for a higher paying job, or start side hustling too.