Financial setbacks are no fun. If you don’t have the funds in your bank account or on your credit card to cover your transactions, you’re likely to receive one or more overdraft fees.
What exactly is an overdraft fee? An overdraft fee is what a bank charges you for covering the cost of your transactions when you don’t have enough funds in your account. While this coverage can provide temporary financial relief, it can also cause financial problems if you regularly lack the funds you need for daily payments and expenses.
If your account goes under zero at the same time that multiple transactions are being processed, you’ll get hit with a fee each time—and those fees can add up, fast.
If you want to learn how to avoid an overdraft fee and get your finances under control, keep reading.
How Do Overdraft Fees Work?
Overdraft fees occur when a bank covers a transaction for you when you don’t have enough funds in your account to pay for it. Say you had $60 in your account and you made a purchase of $75. Your bank might cover the transaction, but they’ll charge a fee—typically $35 per transaction.
Overdraft fees are not as uncommon as one might think. In fact, consumers who pay overdraft fees average over $250 on overdraft fees per year.
While overdraft fees are an annoying part of modern banking, they usually won’t spell financial ruin if they only happen every once in a while. Problems can arise, however, when your bank account regularly hovers on or near zero and you rack up the fees. That’s when you might end up spending an entire paycheck just on overdraft fees, which can have disastrous consequences.
Can a Bank Decline a Transaction?
Yes, they can. When you overdraw your account as part of a transaction, your bank might simply decide to decline your payment request. If you don’t have overdraft protection, you can expect a non-sufficient fund (NSF) to show up on your account. We’ll talk more about overdraft protection in the next section.
Unlike an overdraft fee, a non-sufficient fund is not a loan, nor is it temporary financial relief for your expenses. Instead, it’s just a fee that accumulates when you can’t cover your payments because of insufficient funds.
While banks are legally obligated to notify you of any fees associated with a deposit account, they don’t have to notify you of a bounced check, which means you might accumulate NSF fees before you have time to react.
Not every consumer is subjected to these types of fees, as some banks, like Bank of America and First Citizens, have eliminated them. As far as averages, consumers can expect an average NSF fee of around $34.
Relying on Overdraft Protection
An overdraft protection service is a solid strategy for avoiding overdraft fees and ensuring you have enough funds to cover your expenses. But what exactly is overdraft protection? Simply put, overdraft protection services cover your transactions by linking one bank account to another, which ensures you have enough funds to cover your expenses. Banks will also often allow you to link a credit card or other line of credit as well.
Some benefits of overdraft protection include:
- Having access to funds in an emergency
- Potentially avoiding overdraft fees
- Avoiding fines from creditors
- Overdraft protection fees are usually lower than overdraft fees
Here’s how it works:
Let’s say one of your auto-payments is scheduled to come out of your checking account today, but your account has insufficient funds. With overdraft protection, money from your savings account (or credit card, etc.) is automatically transferred over, so you won’t have to worry about lacking the funds to cover your bills.
Not all overdraft protection services work the same way, so we encourage you to take the time to understand the different types. Below are three examples.
- Protection transfers: You link a savings account to your checking account (or vice versa) to cover your expenses in the event you run out of funds.
- Grace periods: Some banks will provide a relief period where they give you a few days to get your account back to a positive balance after overdrawing.
- Lines of credit: Think of this as a loan that functions like a credit card. If you overspend on your account, your bank will use your line of credit to pay for the remaining transactions.
With all this said, overdraft protection policies do come with caveats. For starters, overdraft protection isn’t free–You’ll need to a pay a fee to your bank for the service–And it’s not a full-proof protection plan. If both your checking and savings accounts are at zero, for example, then your overdraft protection policy will be of no use.
With overdraft protection, you’re also at the mercy of the bank, because they could decide to revoke your overdraft privileges at any time.
And finally, overdraft protection can be dangerous, since the knowledge that the bank has “got you covered” might encourage you to overspend. This may be particularly true for those who haven’t budgeted correctly or learned how to live within their means.
Is Overdraft Protection Mandatory?
Overdraft protection is not mandatory. Overdraft protection is an optional policy for consumers who desire protection against unexpected financial setbacks. If you are on a tight budget, overdraft protection can help you respond to monetary emergencies immediately.
If you remain on top of your spending habits and retain a positive balance on all your accounts, you may not need to rely on overdraft protection.
How Else Can You Avoid Overdraft Fees?
While overdraft protection can ease financial anxiety, it’s not the only strategy to reduce or even eliminate overdraft fees. Remember, even with overdraft protection, you might still have to pay fees from the bank for the protection service. Here are four additional ways you can protect yourself financially and ensure you avoid accumulating overdraft fees:
1. Maintain a Positive Balance on Your Bank Account
Perhaps the simplest way to avoid overdraft fees is to ensure your accounts always have more than enough funds to cover your expenses. Get into the habit of tracking your daily expenses and recurring payments and assessing where you can cut costs. The more you do, the easier it will be to live a debt-free lifestyle.
2. Set Up Bank Alerts
Sometimes, life gets in the way, making it difficult to remain on top of all your financial obligations. When this happens, it’s worth the effort to set up a bank alert on your phone that notifies you when your amount falls below a certain limit. Think of a bank alert as a safety cushion that streamlines budgeting and spending habits.
This way, you won’t have to remind yourself of any upcoming bills, recurring payments, or missed deadlines that could cause monetary distress.
3. Use a Prepaid Debit Card
A prepaid debit card works like this: You obtain a card and put a certain amount of money on it, and you can spend up to that maximum amount. When you run out of funds, you can add more money to the card, so you can meet all your expenses and other payment obligations.
However, tread carefully if you go down this route. Some prepaid cards come with large fees when you activate or add money to your card.
4. Select a Bank with Reasonable Overdraft Policies
Not all banks operate the same when it comes to issuing overdraft fees. For example, some banks will only charge a fee if you overdraw your account by $50 or more. While that doesn’t necessarily get you off the hook, the financial flexibility can be enough to help you take control of your budget.
Do Overdraft Fees Affect Your Credit Score?
Yes, and no. For the most part, your credit report doesn’t display any of your overdraft fees. Your bank account doesn’t show up on your credit report. However, unpaid fees and interest charges can affect your credit score. Why is that? If you don’t pay your fees in full and within an established deadline, your financial institution will submit your debt to a collection agency.
While overdraft fees may not directly impact your score, they can do so indirectly.
Avoid Overdraft Fees with Power Finance Texas
Learning how to avoid an overdraft fee can help you regain control of your finances and ensure you minimize money problems before they escalate into bigger issues. If you need emergency financial assistance to cover unexpected fees, Power Finance Texas can help.
We offer multiple loan types to help you get your financial affairs in order.
The approval process is quick and simple, and all it takes is a checking account and a few other qualifications.
Apply now for a personal loan to get started.