4 Ways to Stop Bank Overdrafts Forever
Let’s face it, bank overdrafts are not only embarrassing, they are downright maddening. As embarrassing as they are though, they happen – and to everyone at some point! It has happened to me. Since you are here, it has happened to you too. It is not a happy feeling. You feel robbed and cheated. Your bank took your money. Extra money that you didn’t have. I know that gut-dropping, naked feeling you get when you look at a bank account that is in the red. I know because it used to happen to me frequently. Embarrassingly frequently. In 2015, we paid almost $1,800 in overdraft charges (ouch! That hurts to say out loud). But! I’m here to help you dig yourself out of your overdrafting ways and save yourself some future fees!
What is an Overdraft?
First, it is important to understand what it is. An overdraft is also referred to as an insufficient funds fee, or sometimes advertised as overdraft “protection” by some banks. It is an agreement you make with your financial institution that states if you do not have enough money in your account when a transaction comes through, the bank (or credit union) will pay the transaction for you. In return, you will reimburse the bank for the cost of the transaction plus a hefty courtesy fee, generally around $30. This fee is charged per transaction. It can save you from incurring fees from other merchants for returned items or bounced checks, but either way, you end up paying extra.
It is easy to see how these fees add up so quickly. Two small purchases with your debit card when your account is low means an instant $60 whammy in overdraft charges! That hurts! If you did not have the funds to start, the added stress of compounding fees is exasperating. Even more infuriating is that according to this CFPB report, most bank overdraft charges “are incurred on transactions of $24 or less.” On average, you pay more for the “overdraft protection service” than you do the actual transaction. If you put that into actual loan terms, that equates to paying an over 17,000% annual percentage rate.
But it is one of the greatest and unsuspecting ways that banks make their money. Time says that in 2014, just three of America’s banks grossed over 32.5 billion dollars in overdraft fees alone. If you weren’t mad about this before, you should be by now. If you are ready to stop giving your money away (that extra money that you don’t have, mind you), then I have a few solutions. Here, you’ll find four ways to stop bank overdrafts from happening, ranked by ease of implementation.
1.) SET UP BALANCE ALERTS
This one is too easy and requires just a few minutes of your time. Login into your online banking profile and go into your settings or similar application. There is an area dedicated for notifications. Go in there and set up some balance alerts to notify you when your balance drops below a certain threshold. This will help you better track your balance so that if it falls below a certain point, you can catch it and prevent an overdraft.
In my own account, I was able to set an alert for when the balance drops below $200. Now, whenever it drops below that, Husband and I both get a text. You can set the alert to whatever feels comfortable for you. Or, you could also set a ladder of thresholds to alert you so you could gauge your balance by the alert you have received. For example, you could set an alert at $100, another one at $50, and maybe the last emergency one at $20. That way if you get the $100 and $50 balance alert, but not the $20 alert, you know your account balance is somewhere between $20 and $49.
If you are getting any of these balance alerts, you should be checking your account. What pending transactions do you have? Is there a big bill that is coming out? If you can see pending charges, consider transferring funds early instead of waiting and getting hit with those ugly overdraft charges.
If you run into trouble setting this up online, try calling your financial institution’s customer service number. This number is online or also many times on the back of your debit card.
2.) SET UP AUTOMATIC SAVINGS WITHDRAWAL
An automatic savings withdrawal is something you can set up at your bank. It’s your own self-funded overdraft protection. When you do not have sufficient funds in your account to cover a transaction, your institution will automatically transfer necessary funds from your savings account.
Not all institutions offer this service and those that do are not always free. Automatic savings transfer fees can range from being free up to $5 or $10. Banks that do the charge a transfer fee are not ideal, but it is still better than the overdraft charge.
3.) APPLY FOR A LINE OF CREDIT
Once again, not all banks or credit unions will offer this. I used to work for a credit union and they actually had a really great option for overdraft protection: a line of credit (coupled with an automatic transfer). Again, some banks will charge a usage fee ($5 or so), but this is easier than a full overdraft.
A line of credit is kind of like a credit card. It has a maximum borrowing amount and there is an interest rate charged only against the amount borrowed. This Bankrate article can explain it a bit more. For the purposed of overdraft protection, only a small amount is necessary, $300 to $500 maximum amount is ideal. While you can get approved for more, it is best not to indulge.
Likewise, if you do not trust yourself with a line of credit, it is best that you skip this one. Again, just avoid the temptation altogether. If the last two have not worked for you, try the next one.
4.) FIND A DIFFERENT INSTITUTION
If you have not been able to successfully implement any of these solutions or your bank does not offer them, it might be time to start thinking about taking your business (and money) elsewhere. Banks are in the business of making money, this much is true. But they are also there to serve you. If your bank is not serving you, start shopping for an alternative to make a switch. Compare banks using the Find a Better Bank website. You can also compare both credit unions and banks using the Credio website. If you live in Michigan, find a credit union using the Michigan Credit Union Link.
A simple google search for bank or credit union comparisons might do just as much good. However you do it, shop around, compare both rates and institution policies like overdraft protection and transfer fees to make sure you do not end up in a similar situation.
5.) KICK IT INTO GEAR AND GET BETTER AT PERSONAL FINANCES
Okay, I know I said there were only 4 ways, but this last one is good too. We need to look at the real reason why you can’t cover purchases in the first place. The four solutions listed are short-term band-aids to a much larger financial problem, and it is worth addressing here. If you have not yet, it is time to break out your calculator and really start studying your bank statements and spending habits. Are you making enough money to cover necessities? Are the overdrafts from attempting to live outside of your means? Are you simply a bad spender? Is it a little bit of everything?
It is totally possible for someone to be making enough money but still get bank overdrafts simply because she does not monitor her spending. Whatever the reason is, it is time to dig deep to find that reason, and then change it! I have been where you are and I absolutely believe that you can be better.
All things considered, making a change can be hard. Even when it is something that will benefit you. But, by using these four simple and painless solutions you can start saving on potential fees immediately. It is time to take control and keep your money in YOUR pocket.