When your bank balance goes into the negative, financial institutions often charge overdraft fees. While the amount of the fee can vary, in most cases, overdraft fees are around $35. Accumulating overdraft fees can be costly—but you can avoid them by following these tips.
1. Monitor Your Bank Account Regularly
The best way to avoid overdraft fees is by regularly checking your bank account balance before making purchases or withdrawals. Since many bills can be set up on autopay—such as payments for credit cards, loans or subscriptions—it's easy to lose track of how much is available to spend if you only check the account sporadically. Another risk of not checking your balance and reviewing transactions is that you could miss unauthorized transactions and fraud.
Signing up to use your account's mobile banking app can put your balance at your fingertips. This way, you can quickly double-check your account before swiping your debit card or going on an online shopping spree. And if your account is running low, you could consider transferring money from savings or delaying purchases until the next payday.
2. Set Up Low-Balance Alerts
Bank accounts often provide optional banking alerts you can set up to notify you of account activity, and one of the notification options may be low-balance alerts. Low-balance alerts can be sent to you via email, text or push notification when money in your account dips below a certain amount.
Other alert options you could set up to avoid overdrafts are notifications for large withdrawals, ATM withdrawals and unusual account activity. Aside from keeping you up to date on your balance, these notifications could also make you aware of fraud.
3. Pay the Overdrawn Amount Right Away
Some banks now waive overdraft fees if you bring your account balance out of the negative within a certain amount of time. So, if you accidentally overdraw your account, paying right away could help you avoid a costly overdraft penalty.
Commerce Bank, Huntington National Bank, TD Bank, US Bank and Wells Fargo, for example, all offer a two-day grace period. When you bring up your account to zero or higher within two days, the overdraft fee is waived. Consider checking with your bank to see if this type of waiver benefit is available.
4. Opt Out of Overdraft Coverage
Overdraft coverage for debit card or ATM withdrawals is optional. When your account is overdrawn by a debit card purchase, the financial institution is essentially fronting you money to run the transaction, and you pay a fee for that convenience. If you opt out of overdraft coverage, purchases or withdrawals you don't have enough money to pay for would just be declined without a fee. Consider reaching out to your financial institution to find out how to cease your enrollment.
However, if you want to keep some form of overdraft coverage, fee-free options may exist. For example, your bank might offer an overdraft protection service where you can link a savings account or credit card to your checking account. Then, if a transaction overdraws your account, funds may automatically get moved from savings or advanced from the credit card to cover the shortfall with no overdraft fee. However, note that you might have to pay interest on any balances charged to your credit card account.
5. Use a Bank Account With No Overdraft Fees
Lastly, some bank accounts don't charge overdraft fees at all, and shopping around with different financial institutions can help you find a fee-free account.
For example, Alliant Credit Union's high-rate checking account has no overdraft fees and offers a "courtesy" overdraft service to qualifying account holders. With this service, you can overdraw your account without a penalty, but you do need to clear the negative balance right away. If you don't within 30 days, the service may be suspended.
Capital One is another example of a bank that has no overdraft fees because transactions that would overdraw your account are typically just declined. If a payment is approved that takes your balance below zero, there still won't be a fee, but you are responsible for depositing money into the account to bring it back to a positive balance. You can set up automatic transfers from a savings or money market account to cover overdrafts for free.
The Bottom Line
Although we all try to spend only what we have in our bank accounts, sometimes things happen. For instance, you could pay a surprise bill at the same time that your mortgage or student loan payment is auto-debited from your bank account, resulting in a negative balance.
In this scenario, paying during your bank's grace period may be a way to have the overdraft fee waived. If that's not an option, you can avoid pesky fees in the future by switching to a bank account that has no overdraft fee, setting up notifications to warn you of a low balance and enrolling in automatic overdraft transfers from savings to cover balance shortfalls.