The Frugal Creditnista

4 Ways You Can Avoid Overdraft Fees

When it comes to your checking account, I’m sure you've probably encountered a few unexpected charges on your checking account – some may have put you in the red. Although having any extra fee is desire, overdraft fees are especially annoying because of the extra (and expensive) penalties that accrue. 

To make matters worse, banks are raking in over $15 billion in annual income from these charges; utilizing software to determine how to maximize your overdraft charges. The last thing we want is for our hard-earned dollars to go to the company we’re banking with, instead of what we’ve budgeted it for. 

While many banks offer overdraft protection, this is rarely the answer. It has been shown that those that overdraft frequently would actually save money by paying the overdraft fees rather than opting for the overdraft protection.

What Are Overdraft Fees?

Avoid Overdraft Fees

Overdraft fees are charges that your bank applies when you spend more money than you have in your checking account. This can happen if you make a purchase, write a check, or use an ATM that exceeds your available balance. 

In this situation, the bank covers the transaction for you, but it also charges you a fee for doing so. These fees can range from $25 to $35 for each overdraft, and they can quickly add up if you have multiple transactions that put you in the negative – meaning you will pay $25-$35 fee for each individual transaction no matter how big or small the transaction is. 

Overdraft fees can quickly eat away at your hard-earned money, leaving you with less to put towards your financial goals. But, don't worry, with a little bit of discipline and smart financial planning, there are steps you can take to avoid these charges and stay in control of your finances.

4 Strategies to Eliminate or Reduce Your Overdraft Fees

Use a credit card instead of a debit card

This approach requires discipline and the ability to track your spending carefully. If you're not careful with your spending, using a credit card can actually put you in a worse financial situation. However, when used correctly, using a credit card in place of a debit card can help prevent overdraft fees. 

Here, you are using money from the credit card issuer and not directly accessing your own money in the bank account; giving you more flexibility. Credit cards can also offer rewards and cashback programs, which can provide an added benefit to your spending.

One of the biggest cons of using a credit card is the potential for high interest charges and fees if you do not pay your bill in full each month. Credit card interest rates can be significantly higher than those of other types of loans, so it is important to have a strict budget in place and to pay your bill in full each month to avoid these charges. 

Keep some extra money in your checking account

Avoid Overdraft Fees

This is often called a ‘buffer’. A buffer is a small amount of money that you keep in your checking account after you have paid your bills/expenses. It acts as a cushion that helps to prevent overdraft fees by ensuring you have sufficient funds available, which will cover unexpected expenses and prevent the account from going into overdraft, which can trigger overdraft fees.

To create a checking account buffer, begin setting aside a small amount of money each month. This amount should be enough to cover unexpected expenses, but not so much that it affects your ability to pay other bills. As you become more comfortable, gradually increase the amount you set aside each month.

Utilize checking account notification alerts

Most banks offer a variety of alerts to keep you updated on your account, which are useful for helping you to avoid overdraft fees. These alerts notify you of your account balance, low balance, and other important transactions that can impact your account balance. By having real-time information about your account, you can make informed decisions about your spending and ensuring you have enough funds to cover your transactions before you complete them.

To set up these alerts, simply log into your online banking account and look for the alerts or notifications section. You’ll see many different types, such as balance notifications, transaction notifications, or low balance notifications. Be sure you list how you want to receive your notification alerts, by email, text message, or both.

By setting up these alerts, you can stay on top of your account balance and avoid unexpected overdraft fees. This is particularly useful for those who often make transactions and don't have the time to monitor their accounts regularly. The alerts can serve as a reminder to transfer funds or make a deposit if necessary.

Use Cash Only

Avoid Overdraft Fees

This is a tried-and-true method for avoiding overdrafts. By using cash for day-to-day expenses, you can't overdraw your account. 

A cash budget is easy to implement for non-bill expenses. I’ve found it easier to: 

⦿ First determine the amount of money you need to set aside for each bill. This can be done by reviewing past bills and estimating future expenses. 

⦿ Leave that amount in the checking account (or open a separate bill paying checking account) so that you can schedule automatic bill payments,

⦿ Have the funds withdrawn using your account details instead of using your debit card number to ensure you have enough money without the risk of overdraft fees.

There are pros and cons of this method. Pros include increased awareness of spending and a decrease in impulse purchases – once the money is gone; that’s it! – and it helps you stay within your budget. Cons are that it can be inconvenient to have to withdraw and manage large amounts of cash and track expenses/purchases simultaneously.

It is important to note that a cash only budget may not be suitable for everyone, as it requires discipline and careful planning. However, for those who are committed to avoiding overdraft fees and improving their financial situation, this method can be a great way to achieve that goal.

In conclusion, overdraft fees can create a tremendous amount of financial challenges, especially if you’re already struggling. Responsible banking is key to avoiding overdraft fees.  

Hopefully these strategies can help you to develop a method that works best for you. Whether it's using a credit card, keeping a buffer in your checking account, utilizing online banking alerts, or using cash, make a plan and stick to it. You deserve to keep more of your hard-earned cash in your pocket, not your bank's.

Need additional tools to get your finances on track? Check out our Online Learning Center, filled with budgeting tools, saving resources, and more!

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