Don't let the bank profit from a short-term cash shortage
6 Ways to Avoid Overdraft Fees
by Evan McLier
Nightmarish Consequences for $15 Overdraft
How Much Should You Keep in Your Checking Account?
It's one of the biggest nightmares for any checking account owner: you check your balance and see a menacing red number. Your account is overdrawn. The fact that you have a negative balance is bad enough, but the hefty overdraft fees your bank will probably charge are even worse. As a personal banker, I see dozens of overdrawn accounts each week, and in almost every case, the overdrafts were easily preventable. Here are some insider tips to avoid seeing your hard-earned money go down the fee drain:
1) Know Your Bank's Overdraft Rules
Overdraft policies vary wildly from one financial institution to the next. Some banks offer a grace period (usually one business day) for you to bring your account positive. Others allow you to overdraw up to a certain dollar limit before charging a fee. Some assess a fee for each item that overdraws the account and others charge for each day the account is overdrawn. Some charge for both! This is why comparison shopping is essential when you open an account. You want a bank that will offer as much leniency on overdrafts as possible. Equally important is to resist the urge to throw away policy information mailed to you by your bank or given to you when you open an account. It may be boring, but you need to know your bank's policies.
2) Decline Overdraft Coverage for Your Debit Card
Thanks to regulatory reforms, you can now choose whether you want debit card purchases or ATM withdrawals declined if the funds aren't available in your account. It seems logical to have the charge declined and avoid an overdraft, but banks make a healthy chunk of change from clients who choose to let these transactions go through. Clients often tell me that they don't want the embarrassment of a declined transaction, but saving your ego from a slight bruise is not worth the bank fees. Other people use the ability to overdraw this way as a form of short-term credit, but using a credit card or even the infamous payday loan would probably be much cheaper.
3) Monitor Your Account Closely
In this age of technological innovation, there are more ways than ever to keep an eye on your bank accounts. Almost all banks offer online and mobile banking tools. Check your account balance at least once a day and before large purchases so you know where your finances stand. If your financial institution offers them, sign up for text or push alerts that will notify you by phone when your balance dips below a certain limit. And just in case you haven't embraced all this new technology yet, just make a daily two-minute call to your bank's automated phone line to check your balance.
4) Keep Track of Outstanding Checks and Automatic Payments
The two biggest overdraft-causing culprits I see are checks and automatic payments that clients did not properly prepare for. Every time you write a check, act as if that money is no longer in your account. With today's payment processing technology, you no longer have the luxury of knowing it will take a few days for checks you write to be debited from your account. They could come out within minutes of when you hand them over. Also keep in mind that post-dating a check accomplishes nothing. Once you pay with it, the recipient will be able to cash it even if the check is dated several days in the future. For payments that come out automatically (mortgage, auto loans, gym membership, etc.), keep a list of the date each is paid and the bill amount so you can budget accordingly.
5) Enroll in Overdraft Protection
Most banks allow you to connect your checking account to a savings account, line of credit, or credit card as backup in case of an overdraft. If a charge overdraws your checking account, the funds transfer automatically from the other account to keep your balance positive. This may be a free service or your bank may charge a transfer fee, which in any case will be cheaper than overdraft fees. However, this should only be used as backup if there is a transfer fee involved. Do not use it as an excuse to not track your checking account balance.
6) Ask for Fees to Be Forgiven
Banks make a tidy profit from overdraft fees, and employees will probably not tell you they can waive them. However, if you ask politely (rudeness will end the conversation before it begins) and don't have a history of overdrawing frequently, there is a good chance the bank will reverse the fee for you. They may not, but you never know if you don't ask!
Evan McLier is a retail banker for a large financial institution in Ohio, where he helps clients successfully manage their accounts and improve their financial wellbeing. He previously worked as a certified credit, budget, and housing counselor at a national nonprofit organization.
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