How to avoid overdraft fees

An overdraft fee is a charge issued by a financial institution to cover a transaction made when the amount of the charge exceeds the minimum balance in the account.

Transactions that cause overdraft fees involve a pre-authorized or missed payment.

Avoiding overdraft fees doesn’t need to be complicated. In fact, there are quite a handful of precautions and actions to help you reduce the chances of obtaining an overdraft fee or avoid it altogether.

1. Overdraft protection

If you have a chequing account, you’ll likely have the option of overdraft protection.

Overdraft protection is a service that banks and credit unions provide to help you avoid overdraft fees. Think of it as a small fee that helps you avoid larger fees, with monthly interest on the amount borrowed.

Considering how overdraft protection works, it isn’t necessarily the best approach to avoid spending money by spending money. However, it is often cheaper if you are prone to obtaining these annoying fees regularly.

With overdraft protection, the account holder is responsible for paying back these fees:

• The amount of the transaction, if lent on behalf of the financial institution,
• The monthly fee that the bank charges you for lending the money, known, and
• The interest charged by the bank for lending, which, on average, sits around 21%.

2. Pay your bills manually and on time

Paying your bills manually, while a hassle in itself, is the most effective means of avoiding overdraft fees.

Automatic withdrawals are the main culprit of overdraft fees, considering that automatic withdrawals do not stop if there aren’t enough funds in the account. Manually paying your bills on time avoids this entirely.

3. Avoid pre-authorized transactions

Pre-authorized payment options are exceptional. The “set-it-and-forget-it” approach to banking is very attractive for many who seek to eliminate the anxieties and stressors that come with paying bills.

However, if you do not have a sizable balance in your account to pay those bills, it’s probably not the best idea to set up automatic payments, transactions, or transfers.

4. Use a credit card (wisely)

Credit cards combine the best options for avoiding overdraft fees, and using one to make payments in the absence of cash is likely your best option—if you pay your bill on time.

Credit cards help you avoid overdraft fees by allowing the automation of any transactions or bill payments. It also allows you to pay your bills at the end of the month, avoiding surprises.