What’s the Best Way to Avoid Bank Overdraft Fees?

Holly Johnson

October 1, 2018  •  5 Minute Read

Financial Tips

When it comes to choosing a bank, there are several ways to keep costs at a minimum while scoring valuable benefits. You can opt for a bank that offers free checking, high interest savings account options, or online banking perks that make paying bills or making deposits easy, for example. At the same time, you should compare checking and savings accounts to make sure you choose an option with little to no fees.

The part about fees is especially important since your checking and savings accounts should be as close to free as possible. In addition to account management or transaction fees, you’ll also want to make sure you understand the fees you’ll be charged for an overdraft. According to the Consumer Financial Protection Bureau (CFPB), the median overdraft fee among major banks in the U.S. worked out to $34 last year.

What Is a Bank Overdraft?

At this point, you may be wondering what an overdraft is — and how it works. The concept is simple: the term “overdraft” is used any time a consumer doesn’t have enough available funds in their account to cover a payment or withdrawal. The bank will cover the shortage and pay the transaction on their behalf, resulting in a negative bank balance and an overdraft fee.

To escape the consequences of a bank overdraft, consumers must make up for the shortage by depositing more money and pay fees charged to their account. The longer they allow their balance to remain in the red, the higher the overdraft fees become.

6 Ways to Avoid Overdraft Fees

If you’re trying to keep fees at a minimum, overdraft fees are charges you’ll want to avoid. Here are six ways to opt out or otherwise avoid pricey overdraft fees and charges:

Don’t Opt-In to Overdraft Protection

The first thing to understand about overdraft fees is an overarching “overdraft opt-in rule” determines who will be charged these fees for use of overdraft protection services. When you open a checking account, banks are now required to ask you to “opt in” to overdrafts and the associated fees. If you choose not to opt in, your bank will then decline any transaction you pursue when your account is underfunded.

The bottom line: The best way to eliminate the possibility of overdraft fees is to opt out when you sign up for a bank account. Keep in mind, however, this could result in some uncomfortable situations where your debit card or ATM transaction is denied when your account is running low.

Sign Up for Overdraft Protection that Links to a Savings Account or Credit Card

Many banks also over overdraft protection that links your checking account to another account with the bank such as a savings account. In that case, any underfunded transactions you would pursue with your debit card would be funded by cash you have in savings. You may also be able to choose overdraft protection that is tied to a credit card.

With either option, you may need to pay a small annual fee or a per-transaction fee. However, this option can still be a smart idea and cost a lot less than allowing your bank to overdraft your account.

Balance Your Checkbook Regularly

Another way to avoid overdraft fees is old-fashioned, but it works! Balance your checkbook regularly by adding new transactions, purchases, and deposits within a few days. Doing so can help you become keenly aware of how much money you have any given time, which can make it easier to avoid overdrafts in the first place.

Some banks also offer handy apps that make it easy to check your balance at any time.

Use a Credit Card for Bills on Autopay

While setting household and personal bills up on autopay can help you avoid forgetfulness and late fees, having these bills automatically paid with a debit card can be a recipe for failure. If you happen to forget these bills will be charged and they hit your account, you will be overdrawn and face fees and charges as a result.

An alternative option is having household bills paid automatically with a credit card. When you set up autopay with credit, you are granted a grace period to repay and you can even earn cash-back or travel rewards on your purchases. One downside of this strategy, however, is the fact that you’ll pay credit card interest if you don’t pay your bill in full each month.

Use a Credit Card for Hotels, Rental Cars, and Other Purchases that Require a Damage Deposit

Some purchases require you to put down a deposit that can charge your account to be overdrawn when you haven’t spent the money. Examples include any time you rent a car or a hotel room. In either case, the vendor you work with will put a “hold” on your account to cover potential damages. When you use a debit card for your deposit, they will put a hold against actual money in your account. This hold can be for several hundred dollars, which can cause you to overdraw when bills are paid or purchases are made with your account.

It makes sense to have a credit card any time you rent a car or a hotel room for this reason. With a credit card, the “hold” will be placed against your credit limit and not against money you have in your bank account. This can make travel a lot more convenient while also protecting you from overdrafts and associated charges.

Sign Up for Banking Alerts

Last but not least, consider signing up for online banking alerts if your bank offers this option. Alerts can be sent via email or text message any time you make a purchase or your account drops below a certain balance. Many banks also allow you to personalize your alerts, making it easy to set limits based on your personal spending and preferences.

The Bottom Line

Overdraft fees can be costly, especially considering you can be charged several within a day if you don’t know your account is underfunded and keep making purchases. Make sure to consider the different ways you can avoid overdraft fees and how they might impact your budget and spending. With the right strategy — and the right bank account — you can avoid unnecessary fees, earn a great return on your deposits, and ensure your banking experience is a good one.