How to Avoid Overdraft Fees

Overdraft fees are frustrating. As if the embarrassment of bouncing that check you wrote to your best friend weren't enough, overdraft fees make overdrawing your account an expensive mistake. Some banks will charge up to $30 per item! If you are a serial overdrafter, that could add up to hundreds, perhaps even thousands, of dollars over your lifetime. Unfortunately, overdraft fees are here to stay, so the best thing to do is to learn how to avoid them.

Difficulty: Easy

Instructions

Things You'll Need:

• Checking account
• Money!
• Something to track your account balance

1. Remember that ATM receipts, internet banking services and even the local branch teller can only tell you what your account balance is at the moment. They do not take into account outstanding checks or electronic withdrawals which have not been processed yet. You must take these items into account in order to determine what is really available to use.

2. 
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   The most accurate way to track your balance is to use a check register or something similar. You may think it is a hassle, but recording every deposit and withdrawal, every debit and credit, will give you a clear idea of just how much you have to spend. It doesn't have to be complicated, either. You can do it on a simple piece of lined paper if you wish. Just record your monthly starting balance on the top line, and then record each transaction on a separate line below it. Subtract the withdrawals and debits, add the deposits and credits, and the result is your real balance

3. Record transactions and deduct them from your balance as soon as you authorize them. Each check you write should be jotted down in your register as soon as you write it or as soon as possible. The same goes for debit card purchases and electronic withdrawals. If you set up regular automatic withdrawals, it would be a good idea to deduct those figures from your balance at the beginning of the month in case you forget to record them later.

4. Keep a cash buffer in your checking account. By a buffer I mean a certain amount of cash above what you may need for each month's predictable expenses and purchases. That way you have a greater chance of being able to handle unforeseen expenses. If, for example, your monthly expenses total $800, try to keep an extra two or three hundred or more in your account above the $800 you need.

5. Beware of check holds. Banks and credit unions have the right to hold a portion of a check you deposit, making it unavailable for a few days, especially if it's a large personal check or you are a new customer. Ask the teller when the funds will become available so you won't be fooled into thinking you can use the funds earlier.

6. Don't count on your bank to move money to cover the overdraft. You might think that if you have enough money in your savings account to cover an overdraft in your checking account, then your bank ought to transfer the funds instead of letting your checking account overdraw. That makes sense, but chances are that your bank won't do it unless you specifically ask them to do so. Why? Well, for one thing it's not really their responsibility to make such assumptions. For another, if they did that then they wouldn't be able make any money off of fees and lines of credit. That sounds a bit harsh, but it's true.

7. Get an overdraft line of credit. This is a great product. Widely available at banks and credit unions, it automatically transfers funds to your checking account in the event of an overdraft. Though you will have to pay some interest if you use it, it's still much cheaper than overdraft fees. Just remember that the line of credit has a limit. If you overdraw your account to the point that your line cannot cover it, you may still have to pay an overdraft fee.

8. Don't confuse an overdraft line of credit with "overdraft privilege." Overdraft privilege is a service which allows you to overdraw your account while still paying the item or items which cause the overdraft. Whereas an overdraft line of credit will transfer funds into your account to keep it from being overdrawn, overdraft privilege actually permits your account balance to become negative. Furthermore, in exchange for providing overdraft privilege, banks will usually charge a flat fee for each item which overdraws your account. This fee actually contributes to the negative balance, and it can be the same as a regular overdraft fee! Thus the only thing it spares you is the inconvenience of having your check bounce. Additionally, like overdraft lines of credit, overdraft privilege programs usually have limits, but these limits can be much lower. Whereas it's not unusual to have an overdraft line of credit with a $5,000, $10,000 or even greater, overdraft privilege program limits are not that high. Use an overdraft privilege program as a last resort only.

9. 
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   Sign up for direct deposit. The great thing about direct deposit, besides saving you the trouble of having to stand in line at the bank, is that the funds are available to you right away. You don't have to worry about having your funds placed on hold as you might if you deposited your check the old fashioned way.

10. 
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    If your account was overdrawn through no fault of your own, fight to get your fee refunded. Sometimes, no matter how careful you've been, your account can be overdrawn because of someone else's error. There are lots of ways that this can occur. A department store can place the wrong charge on your debit card, or the teller can accidentally record a check deposit for the wrong amount, just to name a couple of examples. No matter what, if it's not your fault, you should try to get your money back. Just make sure that you go to the real culprit first. If it's your bank, ask them for the refund, but if it's a store or an individual who wrote you a bad check, go to them, with statement in hand, to show them that their error caused you to overdraw your account. If they will not reimburse you, then go to your local branch manager and ask what can be done.

Tips & Warnings

• Sign up for internet banking. It will help you keep track of what transactions have cleared your account. Just remember the warning in Step 1.
• A check register can be as sophisticated as Quicken or as simple as a notepad. The important thing is to use it.
• If you use a paper register or notepad, keep it in a place where it is easily accessible such as next to your bed. The harder it is to find it, the more likely you'll be to forget it.
• Keeping a budget helps. If you control your spending you'll be less likely to accidentally overspend.
• These are recommendations, not guarantees. As I noted in Step 10, sometimes overdrafts can occur no matter how careful you are.

Resources

• Information on the Expedited Funds Availability Act, or Reg CC (a U.S. law that regulates check holds)
• A free check register in Excel format