Overdrafts occur when you write a check, use a debit card, or make an automatic bill payment without having adequate funds in your account.
The bank may or may not cover the purchase amount (and probably disclosed their policy upon opening the account), but you are left with overdraft fees regardless.
Avoiding overdraft fees is easy if you maintain healthy spending habits and always plan ahead. Bounced-check and nonsufficient funds fees can be exorbitant and racking them up doesn’t take long once a mistake is made.
Stop writing checks thinking that they will be cashed a couple days later when your paycheck comes in. More often than not, they bounce, forcing your checking account into overdraft.
Even if you have enough funds to cover the check amount, the person or business to whom you write the check may not deposit it right away. You run the risk of losing track of that outstanding check amount and spending it before it gets cashed.
Creating a cushion is the best way to avoid overdraft fees. Simply keeping your balance above $100 can help you avoid bank fees.
It’s also a good idea to build up your savings or cash ISA for emergency purposes. In some cases, your savings or cash ISA accounts can be linked to your checking so that any overdraft amount is taken from savings, although you will mostly likely be charged a fee.
Sign up for low balance alerts from your bank. You can opt to receive emails or even text messages when your balance drops below a certain limit. This gives you a warning to transfer funds from your savings or cash ISA into checking.
Avoid overdraft fees by opting out of overdraft altogether. Some banks and credit unions will give you the option of having overdraft purchases declined. This may not save you embarrassment at the checkout counter, but it will save you costly overdraft fees.
Check your account balance regularly; just looking at your online account once a week can help you keep track of queued automatic payments that are waiting to be cleared.
Keep a calendar at your desk or other high-traffic area and write down the dates of automatic payments. This visual serves as a reminder of when the next utility or cable bill will come out of checking, helping you avoid overspending around those times.
Ask for those receipts when you make a purchase and use them to write down every transaction in your checkbook log or financial software program. Record everything: fees, withdrawals, purchases and automatic payments.
Certain banks offer an overdraft line of credit option, which may benefit those with a history of overdrafts. This is essentially a line of credit you would need to be approved for, but it’s in place to serve as a coverage option for overdrafts.
The downside to these lines of credit is that you pay interest because it’s a loan and you may be charged an annual fee, but the costs may save chronic overdraft sufferers from excessive fees.
Living paycheck to paycheck is difficult and some people are resigned to the fact that they will habitually be overdrawn. It doesn’t have to be that way.
Carefully planning and attention to detail can help you avoid unnecessary overdraft fees, saving you money and a headache.
This article is brought to you by MoneySupermarket.com