How to avoid overdraft fees

If you’ve ever had the dubious pleasure of being charged an overdraft fee on your checking account, you can understand how American consumers pay roughly $17 billion annually in overdraft fees and nonsufficient funds fees combined, according to the Consumer Financial Protection Bureau.

If you’ve opted into overdraft protection service with your bank, you’ll get hit with an overdraft fee whenever there isn’t enough money in your checking account to cover a transaction, like a debit card purchase or ATM withdrawal. Even though you don’t have the funds in your account, the bank can allow the transaction and cover the amount needed. In effect, the bank makes a loan to your account in the amount of the overdraft, which puts your account into the red. But banks can charge hefty fees, referred to as overdraft fees, for the service. An overdraft fee is generally a fixed amount and usually in the ballpark of $35 per transaction on top of repaying the bank, which can leave quite a dent if you have multiple overdraft transactions.

On a positive note, by following some simple strategies, account holders shouldn’t have to worry about looming overdraft fees.

1. Opt out of overdraft protection plans
2. Link additional accounts to cover any shortfalls
3. Monitor accounts regularly and sign up for account alerts
4. Create a buffer of available cash
5. Understand your balance versus your purchases

1. Opt out of overdraft protection plans

Banks may be quick to enroll you in an overdraft protection plan by rationalizing that they only have your best financial interests in mind. But these plans can be costly for you and are not necessary for everyone. Most importantly, remember that overdraft protection plans are optional.

When you’re not covered by an overdraft protection plan, debit purchases or ATM withdrawals from an account with insufficient funds will simply be declined. Keep in mind though, that banks can also charge a fee for declined purchases on accounts with insufficient funds — a fee that can be just as costly as overdraft fees. Before enrolling, read the fine print for your overdraft protection program to understand all of the fees associated with the plan. And while you’re at it, read through your checking account agreement to find out if your bank or credit union charges non-sufficient funds fees.

2. Link additional accounts to cover any shortfalls

There are other methods to help you avoid steep overdraft fees. Some banks’ overdraft protection plans allow account holders to link a savings account or credit card to transfer money to cover any shortfalls. This way, instead of incurring steep overdraft fees for having insufficient funds to cover a transaction, enough money will automatically transfer from your linked account or credit card to complete the transaction.

This safety net doesn’t necessarily come free, though. There may be a related transfer fee, and if a credit card is linked, then interest can accrue on top of the transfer fee. But this fee is typically much lower than the average overdraft fee. As always, before enrolling in or opting out, make sure to do your research on the details of the plans your bank offers.

3. Monitor accounts regularly and sign up for account alerts

The days of banking at branches only from 8 a.m. to 5 p.m. on weekdays are over. Whether you receive monthly bank statements in the mail or bank online, it’s key to routinely monitor your account and your balances if you want to avoid overdraft or nonsufficient funds fees. With the sheer convenience of modern banking, routine balance checks are easy and essential.

Be sure to monitor debit card purchases, ATM withdrawals, written checks and any automatic bill payments you’ve set up. Most banks offer alerts, including low-balance alerts that allow you to receive text messages or emails when you hit a predetermined low-balance threshold. And with most major banks offering mobile apps, access to your finances is literally just a thumbprint away.

4. Create a buffer of available cash

If you have room in your budget, keep extra money in your account to cover miscalculations, or forgotten or delayed transactions, to act as a shield against overdraft and nonsufficient funds fees. Keeping your own personal minimum account balance, if you can manage it, is a good way to avoid most overdraft fees.

5. Understand your balance versus your purchases

It’s one thing to know your account balance and it’s another to know how your purchases affect your account balance. Not every transaction is deducted the same way. For instance, checks can be cashed days, or even weeks, after being written, but automatic bill pay can be scheduled for any day you choose. Items purchased online can be deducted from the account either on the day of purchase or the day the item is actually shipped. It’s never a bad idea to keep track of your transaction history on your own, instead of relying on your bank’s updates.

Bottom line

Avoiding overdraft fees doesn’t have to be complicated. You can achieve it for any budget or account balance. While your bank may offer you an overdraft protection plan, make sure the plan really protects you and your wallet.

Nominal precautions — routinely monitoring your account balances, setting up account alerts and maintaining a cash safety net in the account — can all help avoid unwelcome fees. Be aware of your own spending habits and know how to budget all your transactions so as not to be in the red. Empower yourself to make well-informed financial decisions so that overdraft fees will never be a part of your financial portfolio.