It’s not hard to forget to put enough money in the bank to cover the expenses coming out. Perhaps you forgot about an automatic payment or subscription service you purchased. When this happens, most financial institutions charge an overdraft fee, at a cost of about $35 (depending on the location) that is deducted from your account.
The Truth – Overdraft Protection Explained
Overdrafts like this – where too much is going out of your account than is in it – are very common. Yet, according to a survey from NerdWallet, 66 percent of American consumers don’t know about them, nor that overdraft coverage is an optional service.
In 2010, the Office of the Comptroller of the Currency announced a new regulation that prohibits banks from charging an overdraft fee if a client has not consented to an overdraft protection program. That means you can explicitly opt out of it when you apply for a bank account or card, so make sure to read the fine print. Be warned though, there are banks that still charge a non-sufficient fund fee.
Understand How Overdraft Coverage Works
Overdraft coverage is the bank’s way of helping you to pay those bills coming in even if you don’t have the money in the bank to do so. For example, if you are standing at the cashier of a grocery store, and you swipe your card, but there’s nothing in your account to pay for your groceries, this protection jumps in. It pays the funds out even though your account doesn’t have the money in place. This is when an overdraft fee applies.
Overdraft protection makes it possible to spend more than you currently have in your checking account, which can help in an emergency or if times get temporarily tough, financially speaking.
You can be charged repeated overdraft fees when you continue to make charges to your account, before you’ve even realized or been notified that your account is overdrawn. That can really add up, especially for those with lower incomes. In fact, according to the Bureau of Consumer Financial Protection, about 75% of all overdraft fees are incurred by just 8% of account holders.
Overdraft protection is not a way to avoid fees, but with careful management it can help you reduce them: paying the typical $10 to $12.50 per protective transfer is still preferable to getting hit with a $35 overdraft or NSF charge. In addition, using overdraft protection will ensure that your transaction is not rejected, as it may be if the bank decides to decline a normal overdraft.
Should You Opt Out?
You can opt-out of overdraft coverage. Let’s say you don’t want to pay those hefty fees. While you are standing at the cashier, your purchase is declined. It’s an embarrassing sting, but it means the bank has refused the transaction. As a result, you are not charged overdraft fees. You’ll need some other form of payment to use to make your purchase.
How to Avoid Overdraft Costs
How do you avoid overdraft fees? The simplest answer is to avoid spending more than you have available, but mistakes do happen.
Consider these tips for avoiding overdraft fees. Because this is a costly expense, it’s best to work to limit them.
- Overdraft protection is the best way for most people to avoid paying overdraft fees. With overdraft protection, you link your checking account to another account that you have with the same bank. When you overdraw your checking account, your bank will automatically transfer funds from your linked account to cover the transaction. This way you avoid paying an overdraft fee and you avoid the embarrassment of having your transaction denied.
- Some banks don’t charge overdraft fees. This is harder to find today. Online financial institutions are less likely to charge these fees than traditional banks.
- Track your expenses carefully. It’s possible to use a phone app to help you. If you pull money from your checking account, make sure there’s enough in there to cover the costs.
- Automate the process of checking your balance. Find out whether your bank lets you set up email or mobile text alerts so that you get notified when an account goes below a certain threshold that you set.
Overdraft fees vs. installment loans
While installment loans pale in comparison to the overdraft alternatives, you might actually be better off using an installment loan to cover an unexpected bill or financial shortfall than you would be using overdraft fees.
If you’re living paycheck to paycheck, there simply isn’t a way to completely escape overdraft fees. That’s why your best solution is to stop living one pay period at a time. And that means building a budget and increasing your savings.
In conclusion, the key is to monitor what you’re spending in every situation. Don’t fall victim to overdraft fees.