How to Avoid Overdraft Fees
Overdraft fees: the unexpected eyesore on your bank statement, with no redeeming qualities, that almost always comes without warning.
If you’ve ever received a Non-Sufficient Funds (NSF) Fee, you’re not alone. Seriously.
Here’s some proof: CNBC reported that banks stand to reap $30 billion in overdraft fees this year alone. That’s a lot of money that could have gone to more fulfilling ventures.
Fortunately, there is a way out! You can easily avoid these pesky fees with a little bit of preparation, foresight, and damage control.
In this Wealth Rocket article, we’ll explain what overdraft fees are, how they work, and how to avoid them, so that you can have a little more wiggle room to save, invest, or spend.
Table of Contents
First things first: What Exactly is an Overdraft Fee?
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.
Still, it almost always involves a charge that exceeds the amount of money in an account.
The average overdraft fee can go as high as $45. That’s a lot of money for something avoidable.
How Do You Get an Overdraft Fee?
Overdraft fees occur when banks, credit unions, and other financial institutions make payments on the account holder's behalf to fund a pre-authorized transaction.
Typically, overdraft fees happen when a charge to an account exceeds the minimum balance in value. The financial institution penalizes through a fee applied to the client's account.
How to Avoid Overdraft Fees
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 checking 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.
Frequently Asked Questions
Ultimately, banks charge overdraft fees because they can. Banks are a business, and, just like you and I, they also need to make money.
Along with interest from loans, mortgages, and credit cards, these fees are a large revenue stream for banks. Think billions of dollars. Overdraft fees tend to be one of the highest paying culprits.
Every bank has its set pricing for an overdraft fee. However, prices typically range from as low as $5 to as high as $45. There are better ways to spend that money!
No, your credit score will not suffer if you incur an overdraft fee. Overdraft protection, on the other hand, comes with its own set of repercussions.
If you regularly use overdraft protection and cannot pay it off in time, overdraft protection can indirectly impact your credit score.
In unpaid, the bank labels your account as "delinquent." Banks then bring your account to the credit bureau, and your credit score will likely reflect this negative impact.