Banks Offer Protection From Overdrafts, Not From Fees
When your bank receives a transaction that exceeds your checking account balance, the bank will do one of two things. They can either process the transaction or they can return the transaction to the merchant. Many people would like the bank to go ahead and process the transaction and banks will give you this courtesy, if youíve opted-in to having overdraft transactions processed.
However, youíll pay a fee if the bank pays a transaction when you donít have enough money in your account to pay for it yourself. In a sense, youíre borrowing money from the bank. This ďcourtesyĒ of processing overdraft transactions helps you avoid bounced checks and declined debit card transactions. In return for the courtesy, the bank charges you an overdraft fee and the fees arenít exactly cheap. According to TIME, the median overdraft fee was $29 in 2011. Market Watch predicts fees could go as high as $40 to $45 this year. That could be a steep price to pay, especially if the overdraft is only a few dollars.
No Overdraft Without Permission
Even though the Federal Reserve passed a law giving consumers the option to disallow overdraft transactions and thus overdraft fees, we still paid almost $30 billion in overdraft charges in 2011. If consumers have the ability to tell banks not to process transactions that would cause overdraft fees, why are we still paying so much?
Consumers may have agreed to overdraft fees out of fear having their debit cards be declined Ė which is what would happen if they opted-out of overdraft protection. For some consumers, an overdraft fee is better than multiple non-sufficient funds fees from the bank and a returned check fee from the merchant, which is what happens when overdraft protection is turned off. For some customers, that type of penalty may be the thing that forces them to keep their checking account balance in check.
Some banks offer an additional service that would allow you to avoid the overdraft fee. This overdraft protection pays overdraft transactions from your savings account or charges them to a line or credit. However, banks even have a fee for this service. The fee is cheaper, often $10 or $15, but it is still more than youíd pay if you never overdraft at all.
You Canít Cheat Overdrafts
Donít skirt too close to your balance thinking you can float transactions or minimize your overdrafts by making purchases in a certain order. Unfortunately, you have no control over the order in which your transactions are processed.
In recent years, banks have come under fire for processing transactions in a way that would causes more overdraft fees, which isnít necessarily in the order you made the transactions. You might make several small purchases and then one big purchase thinking only that big-ticket item would overdraft, but youíd probably be wrong. With a stack of transactions in front of them, many banks will process the biggest item first and then all those smaller items would overdraft leading to several overdraft fees instead of the one that youíd planned for.
The best way to avoid fees from overdrafts and bounced checks is to spend only as much money as you have in your checking account, nothing more. Itís a good practice to have a buffer of $500 to $1,000 in your checking account. The buffer acts as a safety net to catch transactions that might have otherwise caused you to overdraft. Never let your account balance dip below your buffer and youíll never overdraft.
Be responsible with your finances. That means checking your account balance frequently and keeping up with your transactions. It means never swiping your debit card or writing a check you know you canít cover today or that you wouldnít be able to cover after pending transactions have cleared. Yes, that may mean sacrificing something right now, but it also frees you from overdraft fees.
Many banks will forgive an isolated overdraft fee. If you accidentally overdraft, call your bank and explain. Let them know it was a mistake and ask that they waive the fee. Fee forgiveness isnít an option for habitual overdrafters. Youíll have to fork over the fees and get more disciplined about your spending if you want to avoid future overdrafts.
Sources: Moneyland.Time.com, Market Watch