Understanding and Avoiding Overdraft Fees
Have you ever been blindsided by that doomy-looking bank statement, indicating your account is not just in the red, but you've also been slapped with an overdraft fee? If you've experienced this, you're certainly not alone.
In this blog post, we're going to break down what an overdraft fee is, how it works, and most importantly, how to avoid it.
What Is an Overdraft Fee?
The first question that might pop in your head is “What is an overdraft fee?" Simply put, it’s a fee that your bank charges you when you spend more money than you have in your account. Think of it as a “loan” that the bank provides you. And an expensive one.
If you enrolled in your bank’s overdraft program, it'll pay the amount you’ve overdrawn. But they will also slap a fee on top which typically range from $10 to $35.
How Do Overdraft Fees Work?
Overdraft fees occur when you spend more money than you have available in your checking account and the bank covers the difference. This could happen with any transaction, whether it's writing a check, withdrawing cash from an ATM, making a debit card purchase, or setting up an automatic bill payment.
Suppose you have $50 in your checking account, and you swipe your debit card at a restaurant for a $60 dinner. Instead of declining the transaction because you don't have enough funds, your bank allows it to go through. This results in your account balance dropping to -$10. Since your bank covered that extra $10 for your dinner, they'll charge you an overdraft fee 🙃
Every subsequent transaction that you make while your account is in the negative will also typically result in another overdraft fee.
Some banks also charge an extended overdraft fee if your account remains in the negative for several days. This means that not only do you have to repay the amount you overspent, but you also need to pay the original overdraft fee, plus any additional fees, which can add up quickly.
So basically, don't go into your overdraft if you can avoid it.
How to Sidestep Overdraft Fees
Now that you know what an overdraft fee is, we're pretty sure you'll wanna avoid it at all costs. Here's how:
🔎 Monitor your bank account regularly: Just as you check your emails or social media, check your bank account regularly too. Most banks offer online services and mobile apps that allow you to check your account balance anytime, anywhere.
⚠️ Set up balance alerts: Many banks offer notifications when your account balance drops below a certain level. Setting up these alerts can be a great way to stay ahead of overdraft fees.
❌ Opt-out of overdraft coverage: If you choose to opt-out, transactions that would result in an overdraft are simply declined. While it may be inconvenient, it’s a guaranteed way to avoid overdraft fees.
💳 Link a savings account or credit card: Another way to avoid overdraft fees is by linking a savings account or credit card to your checking account. If you do happen to overdraft, the bank will pull funds from the linked account to cover the difference.
Overcoming and Avoiding Overdraft Fees
Overdraft fees, once an overlooked aspect of personal finance, are now a well-known enemy. And now you know exactly what an overdraft fee is, how it works, and strategies to avoid it, you're better equipped to protect your heard-earned money 💸
Keep in mind that everyone can make a mistake, and you might face an overdraft fee despite your best efforts. If this happens, don’t be discouraged. Instead, use it as a learning opportunity.
Here's to a future where our bank accounts stay healthy and overdraft fees become a thing of the past 👋
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