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How to Avoid Overdraft Fees

How to Avoid Overdraft Fees


    The crash of 2008 was supposed to be a wakeup call to the dangers of negligent lending and irresponsible credit use. Yet, financial institutions continue to sell naïve customers on expensive credit products like overdraft protection.  Sold as an “essential” account add-on, Overdraft promises to protect clients for overdrawn funds on their account.

    In a recent article on Time.com, Martha C. White writes about the $30 billion in profits American banks have made from overdraft fees in 2011.

    “Once overdrawn, customers are subject to high interest rates and outlandish fees. For some customers the deficit is a permanent and damaging fixture in their account, setting themselves up for larger and more destructive financial issues..”

    Avoid the fees and exorbitant interest rates that accompany short-term credit products by being better prepared for account shortfalls.

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    Solid Financial Planning

    Financial institutions need to reorganize their priorities. Instead of focusing on credit products, banks need to emphasize sound financial planning and offer unbiased advice to their clients.

    Sadly, a simple inquiry at a bank can result in an undisclosed credit check, an offer for a pre-approved mortgage, and unsolicited preapproved credit card offers. Never agree to take on a financial obligation without taking the time to understand its impact on your financial and mental well-being.

    Protect yourself by developing a long-term relationship with a personal banker or financial advisor that is acting in your best interests, not the banks.

    Do you have overdraft protection?

    Remarkably, most customers are unaware that they have overdraft protection until they take a closer look at their account activity. For some, it can be years before they realize that they are paying for a service they never use.

    Remember, you are under no obligation to sign up for any service you do not want. This includes any products that the bank wants to bundle with an account opening or credit offer. Tied selling laws in Canada and the United States prohibit financial institutions from forcing you to buy an unrelated product in order to obtain another product.

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    Overdraft Protection

    The key to any budget is avoiding the small incidental costs that can accumulate over time and ruin your financial projections. This means that you have to avoid any additional services that are going to cost you fees or charge you interest.

    The first rule, is always keep your account in a positive balance.

    While easier said than done, examining your transaction history will allow you to see how, and where, you are spending your money. Sometimes, the reason for overdrawing your account can be as simple as bill payments not aligning with your paycheck. A quick solution is to call your bank and make sure your bills line up with your pay schedule.

    Other times, shortfalls in an account are the result of frivolous spending. After examining your account history, it will be apparent where you are spending your money. People are conscious of the large purchases and the essential bill payments, but smaller expenses seem so insignificant that you fail to consider them when examining your spending. Once you tally up the coffee and fast food purchases, you can see how they can push your account into the negative.

    Most importantly, be diligent in finding pre-authorized payments. Without checking, you may be paying for a long forgotten gym membership or a cancelled subscription to AOL’s dialup service.

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    Be alert

    No matter how diligent you are about money management, there is always going to be scenarios that are out of your control.

    Both financial institutions and financial software packages like Mint.com allow you to create alerts that will send you a text, phone, or email message when your account is low on funds.  Besides low fund alerts, you can also program some of these services to alert you to unauthorized debits from your account. Therefore, allowing you a chance to correct an error before a payment comes out.

    Going Old School

    Using cash is a great way to avoid account shortfalls. Based on the information you gleam from your transaction history create a cash budget for each week. This way you always know that a certain amount of money will be in the account to cover bill payments.

    Unless you are reviewing your transactions on a daily basis, you will find that you will unconsciously spend more with a debit card than you would with cash.

    Other strategies include avoiding preauthorized payments. By collecting all your bills and paying them one by one, you can gain a clearer picture of your financial health.  If you choose to go analog, be sure to be diligent about making your payments. Otherwise, a missed mortgage, insurance or vehicle loan payment can have devastating financial ramifications.

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    Emergency and Reserve Funds

    Instead of opening a single checking account, open a companion savings account. Dedicate yourself to putting away at least 20% of your paycheck into the new account. The account will allow you to limit your spending, and give you a financial cushion in case of a budgetary miscalculation or bank error.

    Make sure you have the ability to transfer money between the accounts at an ATM, or through online banking.  At any time, you can sure up a low or overdrawn account with the appropriate amount of money and avoid the need for costly Overdraft protection.

    In order to serve as a proper reserve or overdraft account, you need to maintain a months’ worth of mortgage, insurance, and loan payments.

    Conclusion

    In summary, good money management starts with taking responsibility for your spending and controlling what comes in and out of your checking account on a monthly basis. Once, you understand the problem, you can make adjustments to fix any issues and create a backup plan that protects your hard earned money and allows you to avoid any additional credit debt.

    (Photo credit: Fees in Wooden Letters via Shutterstock)

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    Last Updated on March 4, 2019

    How to Use Credit Cards While Staying Out of Debt

    How to Use Credit Cards While Staying Out of Debt

    Many people will suggest that the best thing to do with your credit cards during these tough economic times is to cut them up with a pair of scissors. Indeed, if you are already in huge debt, you probably should stop using them and begin a payback strategy immediately. However, if you are not currently in trouble with your credit cards, there are wise ways to use them.

    I happen to really love my credit cards so I will share with you my approach to how I use mine without getting into deep financial trouble.

    Ever since about 1983 when I got my first Visa card, I continue to charge as many of my purchases as possible on credit. Everything from gas, groceries and monthly payments for services like my cable and home security monitoring are charged on credit. Despite my heavy usage, I have maintained the joy of never paying any interest fees at all on any of my credit cards.

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    Here are some tips on how best to use your credit cards without falling into the trap of paying those nasty double-digit interest fees.

    Do Not Treat Credit Cards as Your Funding Sources

    Too many people treat their credit cards as funding sources for major purchases. Do not do this if you want to stay out of trouble. I use my credit cards as convenient financial instruments so I do not have to carry around much cash. In fact, I hate carrying cash, especially coins. When you buy things on credit, the purchases are clean and you will not get annoying coins back as change.

    I do not rely on my Visa, MasterCard or American Express to fund any of my purchases, large or small. This brings me to my golden rule when it comes to whether I will pull out any of my credit cards either at a retail or online store.

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    I never purchase anything with my credit cards if I do not have the actual cash on hand in my bank account.

    If I really cannot pay for the item or service with cash that I already have at the bank, then I simply will not make the purchase. Remember, my credit cards are not used as funding sources. They are just convenient alternatives to actual cash in my pocket.

    Make Sure to Always Pay Off Balances in Full Each Month

    The next very important part of my overall strategy is to make absolutely sure that I pay the balances in full each and every month no matter how large they are. This should never be a problem if the cash has been budgeted for my purchases and secured in the bank. I have always paid my full balances each month ever since my very first credit card and this is why I never pay interest charges.

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    Using Credit Cards with Rewards

    Most of my credit cards are of the “no annual fees” type, including one MasterCard on a separate account I keep at home as a spare in case I lose my wallet or incur any fraudulent charges. However, I do use a main Visa card which does have an annual fee because all purchases on that card reward me with airline frequent flyer points. For me, the annual fee is worth it since I do travel and I get enough points to redeem many free flights.

    You have to decide for yourself if you will charge enough purchases on credit each year without paying interest charges to warrant a credit card that rewards you with airline points (or other rewards). In my case, the answer is “yes” but that might not be the case for you.

    I occasionally use a MasterCard or American Express card on small purchases just to keep those accounts active. Also, I have been to the odd retailer that accepted only a certain type of credit card, so I find that having one from each major company is quite handy. Aside from my main Visa card which earns the airline points, the rest of my cards are of the “no annual fees” variety.

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    So this is how I use my credit cards without getting into any financial trouble with them. This strategy is recommended only if you are not in debt, of course. In fact, it is worth keeping in mind once you’re out of debt so that you can keep your credit cards active and treat them responsibly.

    What are your credit card usage strategies? Let me know in the comments — I’d love to hear what methods you use.

    Featured photo credit: Artem Bali via unsplash.com

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