How to Avoid Overdraft Fees
As I mentioned earlier today, overdraft fees (also known as NSF fees, insufficient funds fees, etc.) are basically interest paid for the privilege of using a bank’s money for a short period of time, a loan. There are ways to avoid them without yelling at underpaid customer service representatives who don’t have the authority to help you with the issue.
It’s better to prevent overdraft fees than attempt to have them reversed after they appear on the monthly statement. Several of these preventative tips are covered in Overdrawn!, the documentary I mentioned this morning. This advice is generally straightforward, and many people might find these tips to fall under “common sense.”
Before taking action, keep in mind that forgoing overdraft protection adds more responsibility to you, the customer, if you want your checks to clear and your purchases to complete.
Don’t accept overdraft protection. When you apply for a new account with a bank, if you have an option of overdraft protection, decline. If the option isn’t explicit, talk to a bank representative before opening the account. The option may be hidden to the customer. If there is no option, even after speaking with a representative, consider opening your account with a different bank.
If you’ve already opened the account, call customer service and as for the “feature” to be disabled on your account.
Track your deposits and withdrawals. By declining overdraft protection, you leave yourself vulnerable to rejected transactions and bounced checks. Keep in mind that deposits via check may take several days to increase your available balances, and track your spending using software like Quicken, Personal Capital, GnuCash, or any tracking system works for you (as long as it does work).
Link your checking account to a savings account. Of course, this option is most effective when your savings account carries no maintenance fee and no fee for transfers for overdrafts. Most importantly, the savings account must be funded to cover the overdraft.
Linking a credit card, as offered by many banks, may not be a good idea. This approach encourages taking on more debt. Your overdraft may be considered a cash advance, which on most credit cards carries a higher interest rate than a purchase. If no other options are available, this may be the best way to avoid the accidental NSF fee.
Buffer your balance. Many people manage to keep their checking account as low as possible, either out of necessity as living paycheck-to-paycheck is a reality for many families, or for maximization of interest. To maximize interest income, the prevailing thought is to leave your checking account as low as possible and transfer any unused cash to a high-yield savings account, so more money is working to earn interest.
If your checking account is subject to overdraft fees and if you believe you are prone to making a mistake with your money management, consider trading some potential interest for a safety net in your checking account. Pad your balance by $100, $500, or $1,000 — whatever works for you and your cash flow — to help ensure you won’t accidentally withdraw more than you have. If it helps, don’t record this padding in your Quicken records. This way you may not be tempted to spend your buffer.
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I use a Fidelity MySmartCash account as my primary account. Checks are free, the account earns interest, all ATM fees are rebated, and you are able to link your checking account to your other accounts at Fidelity. If there is ever an overdraft due to a check, ATM withdrawal, debit card transaction, etc., and there is insufficient cash in the account, cash is automatically transferred from another account for free. You can specify which account any overdraft amount is transferred from, and also have an additional amount transferred to replenish the checking account to a “safe” balance ($250, etc.).
I suggest keeping your receipts and being dilligent using them to debit/credit your account. not oly will you alwyas be aware of whow much money you have avaiable you will also understand where your money is going.
The contest has ended. Thank you!
I use American Express for 95% of the time and PIF at EOM. with hilton honors points get 12-16 hotel rooms for free every year. you just need to make sure you have the money to pay.
my advice echoes what others have said here, but for me the most important weapon i have is tracking my spending and having all of my bills in a spreadsheet. the ability to see what income is going out and where i stand makes the process painless. i also do get e-mail alerts when i come within a preset threshold and when a preset amount of money goes out. hope that helps
Like many others, I like to avoid fees of any kind on financial accounts. As for overdrafts, I estimate monthly bills paid via checks or automatic withdrawals. It’s easy as amounts don’t change that much month to month…. Then keep a few dollars extra in checking, just to be sure….. Try to group auto payments on same day, then be sure they are covered.
Well, with Google Docs, set up a blank spreadsheet, then set up a simple form that you can use to add transactions to the database. On your mobile phone or Iphone, bookmark the URL you get for the form and each time you spend something, take a few moments.. update your database via the Google Docs form.
it works a treat. When you get home you can download the transactions from Google Docs. I wrote a similar post in the links above.
I have a friend who works for my bank, so I just call him up and have him reverse my fees.
As others have said, paying with credit (and then paying off the credit card each month) is an easy way to generally avoid the NSF fees (not to mention earn rewards for paying your bills).
Another thing to do is to make a list of all your major monthly payments and their due dates. Try and divvy them up (many companies are flexible with your billing date if you just call) so they’re evenly spaced out based on your pay frequency (if you’re paid twice a month, or every two weeks, for example, then try to have half the bills due in the first week of the month and half in the third week of the month). When you get your paycheck, pay off the bills that are scheduled around the time of that check. Whatever is left over is available for the other expenses that come up (things like food and gas).
I suppose this is really avoidance but in addition to tracking expenses, I’ve trained myself to think of my bank balance as at zero when there’s really about $1000 in it. I’ve tricked myself into not allowing my account to get until $1000 under any circumstances. I guess it’s really just an emergency fund but it’s more about training your mind to ignore the reality of the number and pretend it’s just all zeros. Doing that means that I can’t buy anything if I’m close to the $0 ($1000) and if I accidentally have something withdraw, I ‘freak out’ and ensure to get it back over $0 ($1000). This way I never pay any NSF or overdraft fees, and a bonus is that depending on what the minimum is, I don’t have to pay for checks either. It’s really just a getting into the right mindset and tricking yourself into establishing a bottom limit.
Echoing the use of ING with (limited) free overdraft protection. I also use a low interest money market account linked to another checking account for overdraft protection. Not the best deployment of funds, but it is easier.
If I win it will be a switch back to quicken from M$ Money… They have trashed my data for the last time. ( 8 years worth. My online backup was deleted as well because I didn’t access it enough. )
Seek out a bank or credit union with Rewards checking That way keeping a balance higher than needed monthly won’t mean a loss in interest income. You need to understand the requirements needed to receive the high interest rate though (certain number of debit card transactions are often required.)
I think to use low balance alert is one of the helpful way for you to be mindful when you spend.
Thanks for the chance. I’ve been using Q for more than 15 years.
No debit cards and no ATM use. My regular expenses go on my Discover card (so I can get my cash back – yes, I pay it in full every month), and my checking account just pays that one bill and whatever else I have, so I can’t accidentally spend more than is in the account.
I update Quicken every 3-4 days while I’m reading the news/blogs over breakfast (in fact I’m updating as we speak). This way it only takes about 5 minutes, and it gives me a good idea of what’s in all of my various checking/savings accounts (downside of grad school… too many moves, too many bank accounts).
I pay for everything with credit cards (juggling a few for maximum rewards), then pay in full at the end of the month. I very rarely use a debit card, and I also try to keep at least one month’s rent in the account just in case. (~1000) I rarely write checks,and when I do, they’re generally a recurring expense less than $100
After spending around $800 in overdraft fees for my son (could have bought him a car with that $), I make sure that enough cash is in his checking account. We do use the overdraft protection with a savings account. I would really like to win the Quicken accounting system for my business that I am going to be purchasing in 2009. We need the software before getting the business so that my accounting person can learn how to use it. Please select me!!!!
My suggestion is to talk to your bank. Most banks will allow ovedrafts at no charge. They will do this if: 1. your credit is good or 2. if your account has been in good standing for a long period of time.
The other way that you can avoid paying a fee is to open a savings account. Have the savings account cover your checking this will always give you that cusion just in case it is needed.
I always keep check my main checking account in the morning. It puts me in a mindset to keep track of my spending and keep in mind how much I have spent recently. Plus, I will never write a check for over that amount.
Join a credit union w/o overdraft fees! I also take a peak at my accounts every night so I know if I have the money before I cut a check or make an online billpay.
The most obvious ways to avoid overdrafts are that you need to have the money in your account before you write the check. You can avoid that problem by only using a check card that checks your balance and then places a hold on your account for that amount.
In many places, you can get an Overdraft Loan. It’s basically a line of credit. While I wouldn’t suggest using it a lot, they usually only carry an annual fee and a high interest rate. The one at my Credit Union is $10 a year and a rate of 18%. The rate is horrible and the fee would be too if you never used it. But if you find yourself using it occasionally, both are much better than the $30 or more that you would get if you went overdraft.
The ultimate way to avoid overdraft fees, however, is to pay for everything in cash. Sometimes it’s not possible, but paying for as much as possible that way can really be the best avoidance of overdrafts.
I agree with the others who use the rounding method. It’s easy and over time it provides a nice cushion provided you don’t overdraft by large amounts. Every few months I reconcile this to get a general idea of what I have in the rounding bucket.
Mine is a three step approach. First, I track all my expenditures on a daily basis using Excel. I know it sounds like a lot of work, but I always want to know exactly how much I have. I get frustrated by restaraunts or gas stations that will put a partial hold – if any – for purchases. Also, I’ve also ordered from companies that don’t charge you until they ship, which has been as long as a month after I order. At any given moment, my Excel checkbook is much more accurate than my bank’s online info.
My second step is to minimize the amount of automated withdraws from my account, and to track them at least a month in advance. This has two advantages – first, you won’t get caught off guard by automated bills. And second, by not giving companies automated access to your account, you give yourself more power in dealing with problems. If I get an incorrect bill, I can call customer service first. If it’s automated, I’m forced to try to argue for my money back. Not a good position to be in.
And my third step is to maintain a $100 buffer. Ideally it never comes down to it, but it’s nice to have that emergency stash in case I do make a mistake and forget about something, or if a sudden need for cash comes up. Again, if your using Excel, it’s easy to setup a “holding account” that you automatically subtract from your actual available balance.
Because I’ve been using these steps religiously, I can’t remember the last time I had any overdraft fees.
Great idea for a contest by the way!
In addition to the obvious things like building a buffer into your account, spending less and linking your checking to your savings,if you can’t seem to get out from under never ending overdraft fees, go to an all cash or cash/money order system until all your check clear your bank and you’ve paid all the fees. Draw a line in your checkbook and then start over. Or, if you can’t quite put your finger on it, but you feel like something is not quite right, once your checks clear, change banks.
I concur about USAA; a very good bank with overdraft protection will help protect from fees. Also, you can leave a cushion in your account. If you have $100 in your account, just show that you have $50 and you should always have that $50 cushion. Lastly, do not buy anything that you do not need. We all crave instant gratification, we just need to curb that.
Not really a tip to avoid overdrawing, but a tip to avoid the fees.
1. ING does not charge overdraft fees, but instead will charge you interest on the overdraft amount. So if you transfer the money in same day you will not pay anything.
2. I’m not sure how many banks do this, but Wells Fargo let me link my checking account to my (Wells Fargo) credit card, and any overdrafts automatically charge to the card with no additional fees. I have yet to overdraw my account, but I would think this behaves in a similar fashion to ING.
My bank has free overdraft protection which is linked to my savings account. I still try to avoid a negative balance by automatically depositing enough money to cover my recurring expenses every month, plus a little extra for non-recurring expenses.
I love ING for everything but that, back when the economy first started failing they went through and soft pulled everyone’s credit and if you didn’t have spectacular credit they slashed it to $25, useless for me…
Use ING Electric Orange which gives you an overdraft line of credit. You pay no fees and only interest on the overdraft line until the money gets back in there. Plus checks work like bank checks were you need the cash in the account, so you can’t write a bad check.
I know this isn’t ideal, it’s better to pay closer attention to dates and amounts… but when I have large bills that I need to pay in addition to my regulars and I don’t know when everything will be posted and come through, I’ll transfer the amt of the large bills from a savings into the checking, then transfer that amount back once paychecks and regular bills shake out to make sure I’m covered.
Put a minimum amount of more than your monthly rent + utility bills in your bank account, and check your balance at least once a week (only takes a minute or two to do this).
I completely agree with you. I have linked savings account which acts as a buffer. I wish the pass some regulation regarding the order withdrawals and deposits so as to help the consumer prevent from paying the overdraft fee.
I agree with the previous poster about using Quicken to track your checking account balances. I try to keep approximately $1000-$2000 in my E*Trade checking account at all times, this way I don’t need to worry about tracking small amounts, there’s always money to cover any small transaction. Any larger transactions are usually planned in advance so I just schedule a transfer to occur from savings at the same time. Keeping some padding in your checking account is the best way to avoid overdrafts.
Also, while debit cards are ok for people who can’t control their spending, for almost everybody else they suck. I’d much rather worry about a single large credit card billpay transaction than hundreds of small debit transactions.
The way I avoid overdraft fees is using my credit card for everything that I possibly can and then paying it off in full every month. I also use Quicken to keep track of my expenses and to balance my checkbook and other accounts. It seems easy to me, but I’ve never had an overdraft (knock on wood) and the software makes it easy to keep on top of things.
After years of no problems with overdraft fees, my wife and I have found that as life has gotten busier our record keeping is lagging and we’ve seen a few of these this year. It’s painful to see the charges these create and how expensive a little lax in record-keeping can be.
In our case, we plan to build up a buffer so that we can prevent this from happening in the future. With three kids and the economy the way it is today, this is harder than ever and yet more important than ever!
I will also be exploring the alerts available through our bank today to let me know when the balance falls below a certain level. I’m not sure if our local bank offers that level of assistance, but I’m going to find out. If not, then I may look into the My Yodlee site or another option.
Disciplining ourselves to have a regular pattern of updating our account information seems like an important step in preventing overdrafts in the future.
Thanks for the great information on a consistent basis!
I use quicken and plan out my spending for the next paycheck about 1 week in advance. That is a week before I get paid I enter in all the monthly bills I know will go through into quicken. Then I pretty much only charge to a credit card that gets paid off every month. My actual bank account only has maybe 20 transactions/month. All checks, pre-authorized debits and cash withdrawals.
Works for me.
I have my chequing account connected to my line of credit, but the other way to keep from overdraftings is to:
1) Stop spending too much 🙂 (Sorry figured I’d state the obvious)
2) Set an artificial line in your chequing account (i.e. $0 in Quicken actually means there is still $100 in your real bank account).
Either one works.
C8j
Keeping more money in your account than is exactly necessary to cover your bill is good way to ensure you don’t get charged overdraft charges if you make a mistake in calculating your bills. Of course, one needs to balance between making sure your account is not overdrawn and needlessly keeping money in a low yielding checking account.
Quicken is one of the best ways to monitor your balance. However, if you are married there are other issues to think about as, if you are both writing checks or using debit cards, you may be much more likely to overdraw. We handle this by having one person hold all the checks. For our debit cards, we maintain constant communication about our spending in conjunction with using Quicken to continually update our balance.
I use the following four legged stool approach to avoid overdraft fees:
1. I used ING DIRECT for my primary bank account. For me, that has been one of the surest ways to avoid overdraft fees AND receive a little bit of interest on my account balance. ING DIRECT is at http://www.ingdirect.com.
Even if I choose to have a paper check sent to someone, it *originates* through ING DIRECT and if the money is not in my account the night before the check is scheduled to be mailed, it simply does not go. Naturally the same goes for electronic checks. (I avoid these bounce backs. Read on.)
If I have an electronic debit coming from a merchant or credit card company that is larger than the balance in my account – it just bounces back. (As I said, I avoid bounce backs. Read on.)
Likewise at the ATM. If my withdrawal amount is more than my account balance – I don’t get the cash.
ING DIRECT makes it easy for me to keep track of where I stand. However – I still use a Credit Card and Quicken to track my cash flow.
2. I charge all that I can to the Credit Card – utilities, cable, phone, and similar routine bills. Then I pay the card through ING. I set the card to debit ING automatically each month for the full balance, so I don’t worry about missing a card deadline and paying a fee that way.
Other items like the Mortgage Payment originate automatically through ING.
3. I use Quicken to be sure that I live within my budget and know what by balance at ING *will be* over the next 30 days. What do I mean? I mean that I post, in advance, every bill that will be paid from the 5th of one month to the 5th of the next month.
Sure, some of the advance postings are estimates, and that is where the 4th leg comes in.
4. I receive notice of every bill through electronic delivery. The email account that I read every day tells me when a biller has created a new bill and how much it is. Most of these go to the credit card. I post that data diligently, as received, to the Quicken account (I don’t let Quicken post for me). Others bills will come out of my ING DIRECT account. Likewise I update my ING DIRECT account for the exact amount.
So, as the month goes along each biller notifies me electronically what I owe them (electric, phone, cable, utilities, health care, and so on). I reconcile, update the posting, and have absolutely no surprises.
My ING DIRECT balance and Quicken balance always agree. I know when I have to dig into savings in plenty of time to make the transfer. I have never had a need for a paper check in my wallet. Overdraft fees are 0. Credit Card late fees are 0. I earn a little interest on the ING DIRECT balance. I sleep soundly on my four legged stool.
Pay with cash or credit, not debit or checks 🙂
I have a few thoughts on this particular topic.
First, find a bank and an account that works for you. Many people have mentioned USAA and the good deals they offer which sound great. I bank with a local credit union and for me it is perfect, they have low fees, no ATM fees, and are generally friendly. It is worth being choosy when finding a bank especially if you think you might overdraft.
Second, go old-fashioned. Quicken is great, but sometimes a piece of paper on the fridge still trumps it. My wife and I have a bi-weekly budget. Every 2 weeks we put up X-dollars on the sheet of paper and as we spend money we write the amount or a rounded up approximation of the amount on the sheet on the fridge. This keeps us honest about our budget, then every week or so I quickly go through and reconcile the actual amounts with Quicken. This is a great way to keep track of daily spending, budgeting and avoid overdrafts IMHO.
Finally, check if your bank offers alerts. I have an alert setup that will send an SMS message to my phone and an e-mail if my balance falls below a certain amount. I also have similar alerts for my credit cards that warn me 5 days in advance of the due date if I haven’t made a payment. These 2 minor things have saved me in the past (before I went on a budget) from inflicting these heavy fees.
Also remember that in the case you do go over, most banks allow at least one charge to be deposited back into your account with ease. Any after the first is a headache though.
My identity was stolen a few years ago. The thieves tried to cash many bogus checks, right below the level that requires human processing. My checking account was quickly emptied and thanks to the overdraft protection, part of my saving account as well. I got everything back, but it took several days to clear it up, specially the overdraft fees. If I didn’t have overdraft protection, the damage would have been limited to my checking account and the recovery would have been much simpler.
One way I found to avoid fees is to not carry the debit card around with you. When you get paid, withdraw some amount of money, put it in envelope and use what is available. I see the fees happening due to folks just using the card here and there (it adds up)and not keeping tabs of the purchases. Better to put it away and carry cash. What you have is what you can spend.
As for checks, do all online so when I have to make a payment, I know what I have there to use. Also set up payments to occur around when one gets paid so there is sufficient funds available.
My personal way of avoiding overdraft fees is to sign up for online banking and check my balances once a day to make sure everything is ok. I hate to see anyone having to pay these things!
It is not very efficient, but I check my accounts every day to make sure I am not close. (I also buffer by $1500.)
I recommend as much automation as possible — pretty much any bill can be setup to pull from a checking account automatically. At the same time, make sure you also set up an automatic transfer *into* that account of at least enough money to cover the most expensive month of bills (December for us). Granted, you should still keep an eye on things, but using this general method we almost never write checks and haven’t had an overdraft in almost 3 years.
As a bonus, you can slowly increase the amount you transfer in as a way to build up an emergency fund :).
I set threshold alerts on my accounts. When my balance dips below a certain amount I get an email. That’s the best advice I can give.
I typically know the balance in my checking account pretty well. That being said it’s easy for me to have good sense because I don’t have to make many withdrawals over the course of the month.
Most of my day to day purchases are put on one of two credit cards (one personal, one 50/50 split with my girlfriend for food, utilities etc). My regular debits are 1) automatic savings, 2) rent, 3) Subway pass (through work), 4) 1-2 ATM withdrawals, 5) Credit Card 1, 6) Credit Card 2.
The first three transactions come at the beginning of the month when I get paid, so there’s no risk of overdraft there. I always pay the credit cards off on my home computer so I have access to my balances with MS money, so I know that I have enough to cover them. If I know I’ll have to make an ATM withdrawal I’ll check my balance the night before.
I typically don’t look online because that balance may not reflect all of the transactions that have occured.
Some banks also allow you to define email notifications for various conditions; for example, if your balance drops below a certain threshold. While no substitute for tracking the details with Quicken or similar, this can alert you if things don’t go as planned. (This is similar to what Lance describes with Yodlee, but it may be available to you even without a third-party service.)
I try to have a checking account with online features that allow me to check the transactions and balance in essentially real time. Many banks will send you an email alert if your balance gets below a certain amount.
A teacher told me once how she balances her checkbook, Every month she pays here bills and whatever is left in the checking account is then left there. The next month, she would would only count her deposits as available for bills. Over time a cushion in built up to prevent overdrafts. I review of that balance every once in a while would be to invest the money in other areas, but leaving a cushion in the account.
Using quicken and monitoring your expenses one month out is what I do to make sure I do not have any overdraft on my accounts. I always project my bills into the next month. To deal with emergency you have to have some money set aside in a savings account.
Greetings, Flexo and all those interested in personal finance.
One important thing people should be aware of is that most banks practice the “biggest first” order of cashing checks.
Take someone who writes three checks — one for $1,000 for the rent, and then a pair of $50 checks for groceries and a really good shoeshine (I dunno, I’m just making it up). All three checks hit the bank the same day.
If that someone had $999 in the bank, that poor person will get hit with three overdraft charges, because the bank will first cash the $1,000 check, and then the $50 checks.
If the bank had process smallest check first, the $50 checks would have gone through, and only the $1,000 check would cause the overdraft.
Of course, no one should deliberately write a check for more money than they have, but those who accidentally do so should be aware that bank policies are written in a way that will cause the maximum damage.
It doesn’t matter to me what the bank labels the accounts. Most of our savings is in checking, I don’t keep the balance low enough to risk overdrafts, and I like having instant access to funds at all times. Local savings account interest rates are a joke, but then, even the highest ones we have (ING, Charles Schwab) are not high anymore. We like having multiple financial institutions, and have seven. We pay no fees at any, and at one bank had to open a “savings” account with an auto-transfer from checking in order to keep the account free. It is rare that we use ATMs for cash, but when we do, we use the Charles Schwab account since any associated fees are paid for by Schwab. I don’t like bank accounts that require a minimum balance, but impose one on myself (loosely), because I don’t ever want to pay any kind of fee. I find that this method helps to keep me satisfied with our banks. If you’re not ever-aware and careful about your money, you have to be selective in what bank you use, because some are just not designed for those who can’t keep a buffer.
I always keep at least one month of expenses in my checking account. That’s probably overkill, but I REALLY don’t want to overdraft. Ever.
I’m still using the ’07 version of Quicken along with YNAB, and it’s working out just fine for me, but I’d love to win this one to give to my little sister. Girl could use some $ help.
One thing about overdrafts though is if your check bounces, you get NSF fees on your bank’s side and possibly on the other side too.
One thing would be to make sure to every night, guestimate how much you spent out of your checking account (through debit card purchases, checks written, etc). Make sure to round up. That should give you an approximate idea of how much you spent.
Even better would be to write down every transaction in Quicken, but that might be asking for too much.
I agree with Kate about USAA. I bank with them as well and get free overdraft protection. I do, however, also link my savings account to my checking account. I did that when I was younger and not quite as smart about tracking my money 😉 It seems like a common-sense type of thing to me.
One thing I do is always round up my expenses. Spend $21.45? Round it to $22. Or better, round it to $25. It’s easier to track in your head, and it creates a nice little buffer.
I have a tip regarding overdraft protection: bank with USAA if you’re eligible. I have both savings and checking with them, and the overdraft protection is free. On top of that, they’ll reimburse up to $10 in ATM fees per month when you use other banks’ ATMs. Can’t say fairer than that, can you?
I use the free service My Yodlee to keep track of all my accounts (checking, savings, investments, etc.) and it will allow you to set up automatic reminders and alerts.
I have alerts set up for each of my accounts that send me an email for 3 things:
1 – If the balance drops below a certain minimum, my safety net
2 – Large withdrawals, I do this primarily as a safety feature so that I am aware if there were any large unauthorized transactions
3 – Large deposits, this is just for my information so I can get updated with my payday deposits
This is my best suggestion, set up alerts associated with a minimum balance so that you are completely aware if things start to drop too low and an overdraft possibility exists.