Part of what makes checking accounts and debit cards so appealing is that, unlike a credit card, you can’t spend more money than you have — right? Not necessarily. You can opt into overdraft protection, allowing you to complete a transaction that exceeds your account balance — for an overdraft fee, of course.
What Is an Overdraft Fee?
With overdraft fees, your bank will let you withdraw money from an ATM, make a debit card purchase or write a check for more cash than is in your checking account. However, you’ll pay for this privilege — about $35 per overdraft. Some banks charge a fee of $2 to $5 per day until your account regains a positive balance.
Overdraft fees bring in big, big profits for banks. How big? Banks made at least $11.16 billion in overdraft fees in 2015, according to a report from the Consumer Financial Protection Bureau.
How to Avoid Overdraft Fees
- Keep your check register and budget up to date. Record all checks when you write them. Also record all ATM and debit card transactions. Don’t forget to note fees. Do you pay a monthly fee with your checking account? Did you withdraw some cash from another bank’s ATM? If so, be sure to make note of any fees charged by your bank. Several $2 and $2.50 fees per month can really add up. If the pen-and-paper approach doesn’t appeal to you, a budgeting app or spreadsheet can help you accomplish the same thing. You may also want to consider checking your bank account balance online or through a mobile app on a daily basis, to make sure you know how much money is in your account and that transactions are hitting your account accurately.
- Use automatic payments. Setting up automatic payments from your checking account for utilities, loans and insurance bills is a great way to go. That way you will have fewer checks to write each month and fewer checks clearing from your account. With automatic payments, you can specify the exact date that the money leaves your account. Be sure to make note of all automatic payments in your check register, budget app/spreadsheet or a bills calendar so you know when they’ll happen.
- Review your account statement every month. Be sure to contact your bank if you have any questions or find an error in your checking account statement. Between statements, check your balance online or at the ATM (though this sometimes carries a fee). If you have any doubts about your true account balance, hold off on any big purchases until you are able to balance your checkbook.
- Stash some cash. Overdrawing your checking account by even a few pennies can trigger some hefty fees. Protect yourself by adding a small cash cushion to your account. Put a small amount of money into your checking account and keep it there from month to month, say $100 or any amount you feel comfortable with. Even $50 will do.
- Sign up for online alerts. If you sign up for online alerts with your bank or credit union, you will receive an email when your checking account balance dips below a certain limit, say $50 or $100. This way, you will know it is time to add more cash to your account pronto.
- Steer clear of “bounce coverage” and “courtesy overdraft protection.” Many banks and credit unions offer customers the option to enroll in overdraft programs with varying names when they open their checking accounts. But there is nothing polite about the fees associated with these programs. As we mentioned earlier, customers are charged $20 to $35 per overdraft. And some banks charge a fee of $2 to $5 per day until the account regains a positive balance. Federal legislation in 2010 requires banks to get a customer’s consent to enroll them in these programs, but according to a 2014 survey of overdraft-ers by Pew Charitable Trusts, 52% don’t recall opting into overdraft protection. Not sure if your bank did you the ‘courtesy’ of enrolling you in a super-expensive protection program? Check the fine print of your account agreement or call your bank and ask. If you are enrolled, ask to opt-out of the program. Be sure to follow up in writing.
- Sign up for overdraft protection tied to another account — or opt for rejection (for free). Rather than accept a pricey courtesy overdraft protection program, consider signing up for an overdraft protection program linked to a savings account, line of credit or credit card. You might pay an annual fee for this service and a small fee for each overdraft, but you will be guaranteed protection if you overdraw your account. “Bounce coverage” and “courtesy overdraft protection” programs are operated at the bank’s discretion. So there’s no guarantee that every overdraft will be covered and you could still wind up bouncing a check. Be sure to read the fine print when signing up for one of these services. Overdrafts tied to a line of credit or a credit card makes this a credit issue, and your credit score could suffer from activity on those credit products. (You can see how such things affect your credit by regularly reviewing a free snapshot of your credit report on Credit.com — it’s updated every 14 days.) It can be expensive, too. For example, overdrafts tied to credit cards are generally run as cash advances, meaning they’ll accrue interest as soon as they hit your account, and annual percentage rates (APRs) on cash advances tend to be pretty high.
Or you could just choose for your bank to reject any transactions that would cause you to overdraft. In that survey from Pew, 68% of overdraft-ers said they would prefer to be declined than pay a $35 overdraft fee. In the case of a check, that could be pricey: Banks tend to charge fees for returned checks, not to mention the person or company you intended to pay with the check could send the unpaid sum to a debt collector and damage your credit. That’s why it’s so important to keep track of your bank account balance and time your check payments accordingly.
- Avoid using debit cards to buy gas, check into a hotel or rent a car. These merchants place holds or blocks on your checking account when you pay by debit card, often the full amount of the bill (or more). While no money actually leaves your checking account, a block affects your available balance for a day or two. Just one $50 block from a gas station could be enough to overdraw your account. It helps to have a credit card on hand for such transactions. And, if you have good credit and are interested in earning rewards on your purchases, you can consider getting a credit card with gas rewards. Additionally, there are also a lot of credit cards that reward you for hotel stays, and many credit cards for travelers have built-in rental car insurance that can make these products a smart choice for multiple reasons.
- Avoid using debit cards for small purchases. When you are making a small purchase, pay with cash. Using debit cards for small purchases can make budgeting or balancing your checkbook a real headache. You could easily lose track of your balance and overspend.
- Contact your bank as soon as you slip up. Everyone makes mistakes. If you overdraw your account, deposit enough money into your account to cover the overdraft and any fees charged by your bank as soon as you can. If it’s your first slip-up, call your bank and request that they waive the overdraft fee.
Christine DiGangi contributed reporting to this article.