We all know people who no longer use banks or credit unions. Why? In most cases, it is the overdraft fees. Families who live paycheck to paycheck pay the majority of these fees, and it is often hard to understand why they have been charged.
An overdraft fee is a bank charge that occurs when a withdrawal or purchase causes a negative balance in a bank account. The bank will charge a fee in addition to covering the transaction. The banks in our area typically charge $30-35 per NSF (Non-Sufficient Funds) transaction.
The account might be overdrawn because a check has been written for more than the account balance. A transfer or automatic bill payment may have been made from the account causing the negative balance. More likely, a debit card was used and the payment was honored, and the overdraft fee was charged. This is such a big problem that next week’s column will be about debit cards and overdraft fees.
Here is an example from Bankrate.com that explains how overdraft fees work: “Suppose, for example, you have $50 in your account, but you need $75 to pay for an immediate expense, such as a car repair. You’re $25 short, but the bank loans you that $25 and the payment clears. Now, let’s say the bank charges a $30 overdraft fee. That $30 fee, plus the $25 overdraft, would leave you with an account balance of -$55.” While that account is negative, any other payments that come out of it will also be charged overdraft fees, and there may be another charge if the account is negative more than a few days.
Banks do not have to honor deposits immediately, so people often think they have money in the account, but it has not been posted yet. Some banks shift the order of transactions on a given day, taking out the largest first. If this creates a negative balance, the bank can charge a separate overdraft fee on each transaction. Federal regulators like the Consumer Financial Protection Bureau have curtailed a lot of these practices, but some banks still use them.
Overdraft fees are often called “courtesy pay” or “overdraft privilege.” Banks want you to think they are doing you a favor, because they are saving you the embarrassment of having a payment refused. Realize it is a major profit maker for them!
If you write a check for more money than you have in your account without any overdraft coverage, the check will not be paid and it will be returned to the person or business you wrote it to. You may be charged an overdraft fee. You will probably be charged a fee by the merchant as well, since your check wasn’t honored by your bank.
Automated Clearing House (ACH) transactions from your bank, such as direct payment or bill pay services, may be declined if you do not have enough funds in your account. Many of us set up these automatic payments for things like utilities or subscription services. Some banks charge NSF fees when they are declined.
How can you avoid paying overdraft fees?
Utilize your bank’s online options, so you can check your accounts whenever you want to see what your balance is and whether certain payments have cleared.
If you have a savings account at the same bank as your checking, you might think about linking your savings account to your checking account. If you overdraw your checking account, the bank can pull funds from your savings to cover the shortage, as long as you have enough funds available. Your bank may still charge you a fee for transferring the funds, but it will be less than an overdraft charge.
Consider signing up for an overdraft protection line of credit. You will pay a fee to have this available, but the bank will loan you up to a certain amount (and charge interest) if you overdraw your account.
Set a low-balance alert on your account so you get an email or text when your account has dropped below a certain amount.
Shop around for a bank or credit union that charges lower fees. There are even some national chains that recently changed their policies and do not charge overdraft fees.
Don’t let your account balance become negative, and you won’t have to pay those overdraft fees.