Avoiding Overdraft Fees
Being financially successful is not only about how much money you make but also about how much money you keep. It is important to develop good money habits when you are young as these will carry into adulthood. If you are already an adult and haven’t learned this, now is the time and I hope this article helps. Bank overdraft fees are a pain in the rear end.
There are many areas where you can save money in personal finance, and a little knowledge and effort can help you keep money in your pocket. With any area of personal finance, it is important to begin with good, fundamental habits.
When you start with good habits and these become a part of how you operate, you become accustomed to doing things the right way. I have been in the banking business my entire adult life and have seen many people, young and old, give my bank money that they should have been keeping for themselves and their families.
What I am talking about are bank fees. Banks make money from consumers basically in two ways, interest and fees. In this article, I am talking about overdraft fees.
An overdraft fee occurs when you use your debit card, which is a point-of-sale transaction, or writes a check but doesn’t have enough money in your checking account to cover the cost of what was just purchased. It goes something like this:
The sale takes place at the store and you will walk away with them. The check or point-of-sale transition travels electronically from the store to the bank. Once the transaction hits your account, the bank has two options.
- Pay the item, or
- Send the item back to the store. Either way, you will be charged an overdraft fee.
The national average for an overdraft fee is approximately $35.00 per item, so not only have you spent money you didn’t have, you’ve spent an extra $35.00 on the item because of the overdraft fee.
Depending on your creditworthiness, the time you have had your account and if you have been responsible for handling your account, the bank may elect to pay the transaction and assume the risk that you will cover this overdrawn amount.
As I mentioned above, the bank also has the option of returning your transaction to the store. If this is the case, the store will also charge what is called a “returned check charge.” These charges can be as high as $50.00. Let’s say you found a good deal on a sweater and you decided to buy it.
You haven’t been keeping up with the balance in your checking account, but you buy it anyway.
The sweater cost $40.00 and you are excited because you got a good deal. You use your debit card and take your bargain and leave. Two days later you receive an email or notice by mail that your purchase created an overdraft fee of $35.00. You also find that the bank sent your transaction back to the store since you didn’t have enough in your account to cover the cost of the item. The store then levies a $50.00 charge on you since they now have the inconvenience of tracking you down and trying to get you to pay for this sweater (since the bank didn’t pay the transaction). Now, look at the cost of this sweater you still haven’t paid for: $40.00 + $35.00 + $50.00 = $125.00. You now must come up with $125.00 to put into your checking account just to get it back to zero.
So what is the solution? One sure-fire way to keep this from happening is to keep a ledger of all deposits and withdrawals that are added and subtracted from your account.
Your check register/ledger is a simple solution and will help you avoid the expensive problems of being charged overdraft fees, however, you must be consistent and put in some effort to make sure your ledger is up to date and accurate.
While effort and consistency are the key ingredients that will keep you from excessive fees, other things can help you along the way. Before debit cards we called this ledger, balancing your checkbook.
There are two types of overdraft protection and you need to understand the difference. The first is a SAFETY NET for your primary checking account.
This overdraft protection plan uses one account to back up another, in case one account goes into an overdrawn position. This is generally done by an individual consumer with a primary checking account and a savings account.
If the primary checking account goes negative, the bank’s system is set up to “sweep” the money from your savings account to your checking account.
Now, this is not free (generally an $8-12 charge) but it is a far cry from $35.00 for one overdrawn transaction. The best part of this type of overdraft protection is that it covers as many checks as you have money for. This means the bank only makes one transfer, which costs you a mere $8.00, not $140.00 (4 checks x $35.00). This is one of those services the bank may not mention at account opening. So, #1, ask your bank to sign you up for this service, and #2, you must have money in your savings account for this to work.
The other type of overdraft protection is more of a psychological play on a product. Let’s say you have a checking account and you don’t always keep track of your items or balance your checkbook.
The bank offers a product that gives you overdraft protection. Some names are “Courtesy Coverage” or “Convenience Overdraft Protection”. etc. These products usually allow you to overdraw your account to certain limits with the assuredness that your check or debit card transaction will not be returned or denied.
This sounds good, but what happens when the items hit your bank account? The bank charges you $35.00 for EACH item. You are paying high insurance to make sure your transactions are not denied. Yes, you have the convenience and avoid the embarrassment of being denied at the point-of-sale, but you have paid a high price for that convenience. I would suggest that you tell your bank’s Customer Service Representative (CSR) that you want to opt-out of this product as it allows you a false sense of security when it comes to money management.
One more thing, ask the CSR to sign you up for your financial institution’s “text alerts”. This will be your best tracking system. Once you purchase with your debit card, you will automatically be notified by text. At the end of each day, you can use these texts to subtract any purchases you have made. This keeps you from having to rely solely on paper receipts. Text notifications is a feature that the bank offers free and is a great resource to help you keep track of your debit card purchases.
Here is Your To-Do List to Avoid Overdraft Fees
- Ask your CSR to sign you up for the first overdraft protection mentioned above and avoid the other.
- Have your CSR sign you up for “text alerts”.
- Get a check register from your bank, sit down with your CSR and find out what your current checking account balance is.
- Make sure to log every transaction that goes in and out of your checking account.
- Begin to practice good, consistent habits of tracking your deposits and withdrawals and you will be one step closer to gaining control over your finances and one step closer to financial freedom!
I hope you found these 5 Overdraft Protection Tips helpful, if so your comments are always welcome.