7 Ways to Avoid Overdraft Fees
While there aren't any ways to escape overdraft fees altogether (even if you opt out of overdraft protection) there are still many ways to keep them at bay.
There are a lot of things you can do that will hurt your long-term financial outlook, like making weekly visits to the casino or investing in your cousin’s new business idea. (Uber for hot air balloons? Sure, Darryl.)
But while racking up overdraft fees on your checking account is a bit more on the mundane side, it could end up doing just as much financial damage as any ill-timed family investment.
“Overdraft fees are most commonly created when people forget how much a bunch of ‘small’ purchases can really add up,” said Shane Walker, Shane Walker, executive VP and CMO at ProActive FinTech LLC. “A zip through the drive-thru, a stop for milk and bread, some gas in the tank—and suddenly, the bank account is hovering just above zero. And you might not even realize it.”
With an average overdraft fee of $30, overspending your available funds is not a mistake you want to make.
How a $15 meal can cost you $120.
One of the dangerous things about overdraft fees is that they aren’t a one-time thing. Once you’ve overdrawn your account—and been hit with that initial fee—every subsequent withdrawal or debit card purchase will result in a brand new charge.
As a result, the bill can add up really fast.
Licensed CPA Riley Adams shared this story from his college of how overdraft fees took a few small financial mistakes and very nearly turned them into a major money headache:
“I recall an unfortunate event with my brother going to McDonald’s after class. My brother didn’t want food when we got there so I ordered myself some food and incurred (without my knowing) an overdraft fee. That $5 combo meal turned into $40.
“After my brother saw my food, he got hungry and wanted to order something as well. His $5 meal also cost me $40 when the fee was included. And if it wasn’t bad enough, when we both finished, we ordered dessert.
“You can guess what happened. Three overdraft fees plus $15 worth of food was outrageous.”
That’s awful! Luckily, Adams’ tale of overdraft fee-induced woe has a happy ending.
“Fortunately, we contacted the bank explaining we didn’t know we were overdrafting because my direct deposit paycheck was delayed that week. After clearing this up, thankfully, they waived the fees,” he explained.
While calling your financial institution post-mistake is always a good idea, you shouldn’t make that your go-to overdraft avoidance strategy. In order to kiss these ridiculously expensive fees goodbye. we recommend you try one (or more!) of the following seven methods.
1. Use an overdraft line of credit.
Adams went on to say that he rectified the situation by adding an overdraft line of credit to his account to ward off future overdraft fees. This is a product that, in essence, loans your account to cover the overdrawn funds until you can deposit more money in your account.
While you’ll owe interest on any funds that are drawn from this line of credit, the rates you’ll pay will be much lower than the corresponding rates for an overdraft fee. Adams’ $120 meal, for instance, carried an interest rate of 700%.
“It turned out to be a much less costly way to bank than hoping not to get hit with overdraft fees. Many banks have begun to offer this service and I know I’m glad I have mine,” he said.
2. Link an emergency fund savings account.
If you can save up a little bit of money, it’s a good idea to link up a savings account as a form of overdraft protection. While you’ll still incur a small charge for the transfer, you won’t have to pay any interest on the transferred funds.
“Setup an emergency funds savings account,” said Pete Longo, VP of Digital Banking at Axiom Bank, N.A. “Do not make this your main long-term savings account but instead an account where you set aside some emergency funds each payday. Even a small amount such as $5 can build up with proper budgeting over time.
“From here you can choose to link this account to your checking account for overdraft protection if your bank offers it. This will minimize or eliminate fees in the event of a mistake where overspending occurs.”
You’ll still want to take additional steps to avoid overdrawing your account, but this is a much better emergency fallback option than an overdraft fee. You’ll also want to make sure you keep that emergency fund well-stocked, otherwise, you’ll find yourself right back where you started.
3. Make a budget.
Of course, the best way to avoid overdrawing your account and incurring all those extra fees is to keep track of your money! And to do that, you’re first going to need a budget.
“Create a budget at the beginning of the month,” advised money blogger Yaz Purnell of The Wallet Moth. “Set aside money for your rent/mortgage, bills, transport, groceries, leisure/hobbies, and any other monthly costs you incur. Simply having an idea of what money needs to go where is your first step to avoiding accidentally overdrawing your account.”
Not sure how to go about building a budget? No worries! Just check this OppLoans Guide for first-time budgeters, complete with a free budgeting spreadsheet to help you get started!
4. Get a money tracker.
Creating your first budget is a huge step in the right direction. But once you’ve got that in place, you’ll still need a way to keep track of your spending. That’s why Purnell recommends using a money tracking app.
“There are so many free money trackers out there, from Mint to Yolt, that can be easily installed as an app on your phone to track your income and outgoings,” she said. “Download a money tracker and get into the habit of checking your outgoings on a daily basis so that you always have a good idea of how much you can afford.”
You might even have a money tracker right there in your checking account!
“Many banks offer this to customers in their online or mobile banking,” said Longo. “If your bank does not offer it and you do not want to switch banks than look into a free alternative by searching online for personal financial management.”
5. Set up bank notifications.
Sometimes, folks will knowingly overdraw their account because they feel that they have no other choice but accept the fee. But many others simply don’t keep track of their checking account balance and incur overdraft fees on accident!
A great way to avoid the latter is to set up notifications on that checking account that will alert you when your balance is getting low.
“Utilize your bank’s real-time notification system in your online/mobile banking,” advised Longo. “Setup notifications to be sent to your smartphone or email when your checking account balance falls below a set balance (i.e $25).
“This will give you a friendly warning when your funds might be a little too close for comfort and potentially stop you from accidentally ‘overspending’.”
6. Use multiple bank accounts.
If you’re like a lot of people, then you probably only have one checking account that you use for everything. But have you ever considered using multiple checking accounts for different expenses? Doing so could be the key to avoiding overdrafts.
“For larger monthly bills, like your rent and electric, set up a separate bank account and regularly add money to it. Enough to cover those bills, on time, every month” said Walker. “The key is to only pay your larger bills from that account, like your utilities and mortgage.
“By keeping a separate account from your everyday spending, you aren’t dwindling down your balance with daily expenses. The money for those large bills is safe and ready when needed. The average household should have less than 10 payments going out of that account per month, making the math easy.”
In a similar fashion, Walker also recommended purchasing gift cards to use on your weekly in place of a debit card.
“Gift cards have a hard limit that cannot be exceeded and you cannot incur overdrafts on them,” he said. “You can get gift cards for gas, groceries, restaurants and more. They even have them for most major cell phone providers.”
7. Don’t opt-in. (And if you have, then opt-out.)
In the end, there is only one way to avoid overdraft fees altogether … and even that option won’t work in certain circumstances!
“If you are already at a bank that you are comfortable with visiting a branch and discussing “opting-out” of overdraft privileges on your checking account’s debit card. This will make it so your debit card will simply be declined if at the point of sale and there are not enough funds available,” said Longo.
But even opting out won’t work all the time.
“One thing many people do not understand is that even if you do not opt-in for overdraft, you can still get an overdraft fee,” said Adam Rust, Director of the consumer rights non-profit WiseWage.org.
“The bank only allows you to opt-out of transactions where they can verify good funds prior to approval. If you write a check, they will charge you an overdraft fee and pay the bill or decline to pay and charge an insufficient funds fee.”
And make sure you keep track of your automatic bill and subscriptions!
“Important reminder that your account can still be overdrawn in this scenario if you have recurring bills setups such as Netflix or a gym membership as ‘opting out’ cannot prevent these preauthorized charges from coming through” warned Longo.
If you’re living paycheck to paycheck, there simply isn’t a way to completely escape overdraft fees. That’s why your best solution is to stop living one pay period at a time. And that means building a budget and increasing your savings.
Pete Longo is the Vice President of Digital Banking at Axiom Bank, N.A. (@axiombank), a Maitland-based, leading community bank. He has more than a decade of experience in banking, business development and financial software vendor management. Pete graduated with a degree in business management and an MBA from Stetson University.
Adam Rust is the Director of Research at Reinvestment Partners (@ReinvestPartner) and the Director of WiseWage.org (@WiseWage). He advocates for an inclusive financial system. WiseWage has enabled thousands of workers to manage their finances with safe and affordable accounts overdraft-fee-free accounts. At Reinvestment Partners, he has pursued campaigns related to payday lending, basic bank accounts, overdraft fees, high-cost credit insurance, and home mortgage lending. He is an Interim Board Member of the US Faster Payments Council.
Shane Walker is the executive VP & CMO at ProActive FinTech LLC. He gives people better control of their finances by digitizing the successful concept of the envelope system for budgeting. At ProActive Budget, they’ve combined the modern convenience of a debit card with the proven budgeting system of using envelopes. It works because it requires a person to consult their budget before they spend. It changes the behavior of spending money.
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