Whenever we receive our monthly bank statements, we hardly go through the details. Often, we rush to check the balance on the bottom of the page. If your checking account is fat enough, you’re likely to overlook the little bits of deductions (of about $ 34) that regularly hit the account.
But, you could be unlike most people and you’ve noticed these deductions. Good for you!
You’ll also discover that banks apply these fees at a time, in the course of the month, when your checking account balance was almost nil or there was hardly any money.
If you prefer using your debit card or issuing checks to make payments, and at times your payments exceed the available balance in your checking account, three things could happen to the transaction. The bank can decline to complete the transaction; it can be paid into overdraft, or the transaction can be returned unpaid.
Whereas the solution may be considered simple, just make sure you have enough money in your checking account, it’s not that easy. Many people don’t bother to track the balance of their accounts. Today’s checking accounts are more accessible than ever before and banks, like other businesses, seek to enhance their relationship with you by enabling convenience – of course at a fee.
When the bank authorizes a payment that exceeds the available balance on your checking account, the bank levies an overdraft fee to compensate for the service.
Why do banks charge the fees?
Here’s the catch, you wouldn’t want an important payment, such as a utility bill, to be declined just because your account is short by a few dollars. You’ll appreciate your banker if they make the payment (allowing you a little overdraft) and charge you a fee later on when your salary checks in the account.
Of course, the banks love you back for your generosity. In 2017, banks raked in a staggering $34 billion in overdraft fees! That’s about $215 from every working adult in the US or about $ 430 from every household.
Exactly How Much Will You Pay to American Banks in Overdraft Fees?
A study conducted by mybanktracker.com listed the top American banks and the overdraft fees they levy on clients. Here’ are the five topmost on that list of and how much you’ll pay in overdraft fees.
Maximum number of fees Charged per Day
Bank of America
These charges may seem avoidable or outrageous. If you know how to avoid overdraft fees, you can escape the embarrassment of a declined or unpaid transaction, and save yourself hundreds of dollars!
Are the Banks Exploiting You?
Some people are of the opinion that an unarranged overdraft facility amounts to exploitation. Banks should just decline such transactions. If there’s no money, there’s no money! Also, many people incurring overdraft fees on their accounts are often unaware of the charge. They see the charges only after they’re listed on their statements and realize that they have to part with a couple of bucks.
Majority of these payments are from ordinary American families, who are stretched to the limit and often want to make every buck count.
If you look at it from that perspective and consider how much revenue banks made last year in this way, of course, it will look like unfair consumer exploitation! And the authorities should do something about it.
On the other hand, for many people having an unarranged overdraft can be pretty useful. It means some of your checks will not be returned “unpaid” because you are yet to receive your payment. If you are a startup entrepreneur, such a payment can be a deal-saver. Bankers have defended the charges repeatedly referring as an entrepreneurial reward for taking the risk to bail you out.
Whatever side you are on, what matters more is whether you are taking proactive steps to avoid overdraft fees. Here are suggestions on how you can effectively achieve that.
Understand your available balance
To start with, you need to know your banking terminologies and the implications. You’ve probably noticed the words available balance on your bank statements or whenever you check the balance online, through your mobile device or through the ATM.
The available balance on your checking account refers to the most recent record that the bank has of the money available in your account and is available for withdrawal or to authorize payments coming through such as debit card purchases. However, the available balance only includes authorized payments. You may have made some transactions that take time to come through and have an effect on the available balance figure. It creates an incorrect perspective that you have more money available at your disposal.
However, you can take away all the confusion about your available balance and avoid overdraft fees simply by writing down your balance.
Write down all the outstanding obligations you have and track them on a personal transaction register or you can use an app like Trim. Next, faithfully record each transaction (deposit, withdrawal, or debit card purchase and check issued) on your checking account and keep an up to date, accurate record of your actual balance. An app is better than the traditional paper or notebook because you can carry it around anywhere and consult the personal transaction record whenever you want to initiate another transaction.
Start to Budget and Stick to It
As Warrant Buffet would put it, spend only what you have after saving. You can spend only after budgeting. Don’t put the cart before the horse and budget after you’ve spent your income. If you’re in a rut and you’re living paycheck to paycheck, it may seem a little tough but it’s essential that you get it right at this point.
Start small and project your expenditure in the coming week. Then set aside just enough cash to hold you till the end of the week, and no matter what happens do not dip in for more cash.
This way you can proactively avoid your account from going to the negative and you’ll be ahead of the game.
It’s what motivational speakers call, being the boss of your money and not the other way around.
But for you to project your weekly usage you have to know your trends and what’s important. So, start by tracking your expenditure using apps like Personal Capital and use the data to project the coming week.
Build a Buffer
As you take charge of your finances through budgeting, you’ll find that as the weeks go by, you’ll have more cash in reserve and fewer instances of low bank balances. However, you can take it a notch higher and build a buffer balance just to make sure that there are no surprises.
Take note that this buffer is not an emergency fund (although I bet you that it’ll come in handy on a critical day). An emergency fund is set apart – preferably in a not too easy to access account, that bears some interest – and should amount to at least an equivalent of your six month’s expenditure. You can learn more about spotting high interest-bearing savings accounts in this article.
The buffer, on the other hand, is like a self-imposed minimum operating balance. You can start by setting it at $ 50, then gradually raise the floor limit to $ 100 or $ 200 and proceed till you get to an average value that can cover most of your payments.
Have the Bank Help You
If you’ve taken the buffer approach, you can have the bank help you avoid overdraft fees.
How’s that possible?
You can have the bank send you an alert, through a text message or email, every time your checking account the balance goes below a certain figure, then you can arrange to replenish your checking account to the desired level before payments start coming through. Alternatively, you can make sweeping arrangements with your bank and have an automatic transfer of funds from your savings account to your checking account anytime the balance goes below a preset figure or to avoid overdraft positions.
You can also ask the bank to link your checking account to your credit card. Any payment that exceeds your available balance would not translate to an overdraft position but would be charged on your credit card.
Lastly, you can ask the bank to extend a line of credit under your checking account with different terms and charges.
You will still incur some charges with these last two options, so weigh your options carefully.
Speaking of weighing your options carefully, you have to pay attention to your account opening process or new checking account sign up.
As we have already mentioned, many people get into overdraft positions unknowingly. But some shrewd banks take advantage of such clients and manipulate their way into getting you to activate overdraft protection unknowingly.
Some banks portray overdraft protection as an added beneficial feature to their checking account product. They “auto-enroll” you for the service and will cover your payments even when you are low in balance in exchange for the overdraft fees. However, legislation in 2010 made it clear that customers ought to be given the option to opt-in rather than automatically enroll. Nevertheless, banks are creatively enrolling new clients.
The authorities are not blind to this trickery by the banks. Recently, the Consumer Financial Protection Bureau imposed measures against TCF Bank and Santander Bank for purportedly hoodwinking customers into signing up for overdraft protection.
But as Shakespeare mentioned, justice sometimes delays and it’s one of the banes of life. Therefore, your best bet is to ensure that you pay attention to the fine print so that you avoid overdraft fees.
Lastly, Opt out of Overdraft Protection
Yes, that’s right. You have the right to cancel the overdraft protection service.
Opting out of the overdraft protection in your checking account means two things:
First, you’ll avoid overdraft fees.
Second, the bank will simply decline or return as unpaid any transaction that you authorize without sufficient funds.
But, by now the second option isn’t so scary. After all, now you have tips that will help you avoid overdraft fees and the embarrassment or inconvenience of declined transactions.