How to avoid overdraft fees
Quick insights
- Financial institutions may charge overdraft fees if a bank account doesn't have enough funds, but the bank covers the difference to ensure the transaction goes through.
- You can potentially avoid overdraft fees by monitoring your account balance, setting up automatic alerts when your balance falls below a certain threshold and scheduling payments in advance.
- Overdraft protection allows you to link a secondary account, such as a savings account, which can automatically transfer funds to cover a transaction. Keep in mind that some banks count these automatic transfers toward your savings account’s monthly withdrawal limits, which could result in a fee if you exceed that threshold.
Overdraft fees are charges from your bank that occur when you spend more money than you have available in your account, and the bank covers the difference to let your transaction go through. Learning about overdraft fees and how to manage them may go a long way toward helping you improve financial management skills.
Let’s examine overdraft fees and some ways you can potentially avoid them.
What are overdraft fees?
Overdraft fees are charges from a bank that occur when a purchase is made without having enough funds in your account. Banks generally charge an overdraft fee because they covered the difference in the transaction that you made without sufficient funds available.
The cost of overdraft fees varies by bank, but they can add up if you incur them frequently. Sometimes the price of the overdraft fee might be more than the amount that you overdrew.
How to avoid overdraft fees
There are actions you can take to help avoid overdrawing your account, such as opting in for overdraft protection, monitoring your account balance and more.
Sign up for overdraft protection services
Overdraft protection allows users to link a secondary bank account or line of credit to cover costs if the balance of the primary bank account is too low to complete a transaction. If you have overdraft protection, the balance of the secondary account provides coverage against potential overdrafts and the fees that come with them.
Each financial institution determines its own rules for how often you can use overdraft protection. Some banks may allow you to use it as long as you have sufficient funds in the secondary account, while others may have a limit on the number of times or the total amount you overdraft.
Time your payments for when you have a higher balance
If you find that your account balance is low at certain times each month, you may want to consider rescheduling automatic payments or account transfers to times when you typically have a higher balance. For example, if you get paid on or around the 1st and 15th of each month, it might be a good idea to schedule automatic payments for utilities or other bills for a day or two later.
Set up account alerts
Overdrafts tend to occur because the consumer isn’t aware of their low bank balance. Aside from monitoring your account balance, financial institutions may offer account alerts that notify you if the account falls below a certain balance.
These alerts can be customizable, meaning you could set a minimum account balance to trigger the alert. Choose to receive a text, email or in-app mobile banking notification to remind you of the funds you have left at your disposal.
Link a savings account
Linking a savings account to a checking account is one way to help avoid overdraft fees. By linking the two accounts, if a transaction makes the checking account go negative, financial institutions may draw funds from the savings account to cover the amount the checking account is overdrawn.
Drawing from your secondary account may also result in a fee, depending on the financial institution. You may want to consider asking your financial institution about the different associated fees.
Find out about waived fee options
There may be unique circumstances where you can ask your financial institution to waive an overdraft fee. You may have to detail why your account was overdrawn and what made the overdraft a unique instance.
Having a long-standing relationship with the financial institution may help you to get the fee waived. But banks and credit unions may choose to waive fees a set number of times.
Create a budget
Creating a budget may help avoid overdraft fees by providing a detailed breakdown of your income and expenses so you can better understand where your money is going. Creating a budget spreadsheet to plan your everyday expenses may allow you to schedule payments when you have more funds, while potentially allowing you to save by limiting unnecessary purchases.
In conclusion
Some financial institutions charge overdraft fees, but there may be ways for you to avoid overdrafting your account. Keeping an eye on your balance, rescheduling payments, setting up alerts and linking bank accounts are all ways that may help you avoid paying unnecessary overdraft fees.
