Banks make a lot of money raking in fees for all sorts of activities, one of which is overdrawing an account. Overdraft fees for debit card transactions, bounced checks, and ATM withdrawals literally result in billions of dollars in revenue for America’s financial institutions. While it’s big business for them, it doesn’t have to be for you. Here’s what you can do to prevent your deposit account from costing more than it should:
● Keep a cushion of at least $50 in your account. This will help to prevent overdrafts from occurring. You may lose interest by keeping the cushion in your checking account instead of somewhere else, but the amount of lost interest is pretty small. For example, 7% of $50 over a 12-month period is only $3.50. This is much lower than just one overdraft charge.
● Contact your bank and request to opt out of overdraft protection. Some banks charge as much as $35 per occurrence. Under federal guidelines, financial institutions must allow their customers to refuse participation in overdraft protection plans. If you do decide to opt out, keep in mind that you won’t get cash out of the ATM when your balance is too low for a requested withdrawal; but you won’t be hit with a steep overdraft fee, either.
Some banks will allow you to opt out of overdraft protection for specific types of transactions, while still protecting other types of withdrawals. Checks, recurring debit card purchases, automatic bill payments, ATM withdrawals, and point-of-sale transactions are some examples that may or may not be included in a particular bank’s overdraft protection plan. Be sure you know which types of transactions are covered and which are not. Some transactions may be covered for free.
● Sign up for alerts. Most banks offer alerts that can be triggered by a variety of activities, one of which is reaching a balance below a predetermined level. Depending on the financial institution, these alerts may be sent by phone, e-mail, text message, or a combination. Knowing when your account reaches a certain amount can help avoid overdrawing it.
● Consider opening an overdraft line of credit. Some banks will let you set up a line of credit to cover any debit that overdraws your account. There is usually an interest rate for this service that will be charged on the amount overdrawn, but this will be less than an overdraft fee. If you deposit funds to bring the account back up to $0 quickly enough, the amount would be minuscule. For example, 4 days at 17% on a $9 overdraft would cost less than a penny.
● Ask your bank if you can link accounts. If you normally use a debit card and pay bills from your checking, you might be able to link the account to a savings or money market deposit account. Your bank may automatically move funds from the savings to the checking anytime the latter is overdrawn. The fee for this service may be lower than the bank’s standard overdraft charge, or it may even be free of charge.
● If most of your overdrafts occur when using an ATM or debit card, consider using a credit, charge, or prepaid card instead. If you usually use a card for point-of-sale transactions, a credit or charge card could avoid overdraft charges, although some credit cards may have fees for going beyond a specified limit. If you typically use plastic to take money out of a cash machine, a prepaid card would be a better choice. Money can be deposited onto the card, and withdrawals at an ATM are much cheaper than using a credit card.
● Last, but not least, don’t forget to keep a regular eye on your account balance. With today’s technology, this is increasingly easy to do. Most banks offer an automated phone system and mobile app. You can also check your balance at an ATM (some banks may charge for this, however), and some financial institutions now even have an app for smartwatches. If you notice that your balance is getting low, make a quick transfer using your bank’s funds transfer system or deposit a check using your bank’s mobile app. With a little work, your bank account can cost you a lot less.
