How to Avoid Overdraft Protection Fees

Welcome readers of US News’ Alpha Consumer blog! If you want to know more about our budgeting system, I’ve linked to a few budgeting posts about halfway down this post. If you’d like to learn more about how we paid off $40,000 in debt in one year, I detailed it last September.

This morning I heard a story from the Financial Times, by way of NPR, that banks earn $38.5 billion a year from overdraft protection fees. First, this is highway robbery, since most people don’t opt-in to these programs. Second, can avoid paying these fees. If you’ve paid an overdraft protection fee even once, it’s time to take action to avoid paying one again.

Disenroll from Overdraft Protection

About a decade ago, I had an overdraft protection plan. Back then, it meant they pulled money from my savings account to avoid overdrawing my checking account. There was no fee for this, because it was all my money. At some point, the bank stopped offering that and instead switched to using my credit card, but that required a minimum $100 advance, a $20 cash advance fee, and a higher interest rate with no grace period. I opted out of that.

If you’re not sure whether you have overdraft protection, call the number on the back of your ATM card and ask. If they say yes, ask to have it turned off. Yes, your debit card will be declined if you overdraw, but you’ll know right away. You won’t get hit with fee after fee after fee.

If you tend to get hit with overlimit fees on your credit card, ask to have that turned off, too.

Create a Budget and Use It

If you know how much money you have at any given time, you’re less likely to overdraw your account. If you only have $80 until your paycheck hits on Monday, you won’t spend $100 over the weekend. Not sure how to create a budget? Why I have a few posts about different budgeting methods:

The monthly budget combined with the cash flow budget 
The envelope budget 
The irregular expense budget

Spend Only Cash

Some people aren’t good with plastic, and that’s fine. If you tend to overdraw when using your debit card or go over limit with your credit card, withdraw a fixed amount of cash from your account weekly and stop spending when the cash runs out for the week.

Keep Your Balance on a Post-It

If your account balance is low and you have errands to run, check your account balance and deduct any pending checks or purchases from it. Write the remaining amount on a Post-It and stick it to your debit card. Record each purchase as you make it, and then stop swiping the card when your balance gets low. I’d leave a $10 cushion in case any checks or payments post incorrectly. It’s better to leave a cushion than to fight the bank to credit you later.

Spend Less Money

If you frequently overdraw your account, then you’re spending more than you earn. It’s time to cut back. Start using grocery coupons, take your lunch to work, stop engaging in retail therapy, sell some stuff to raise funds, drive less, whatever it takes to bring your spending below your income.

The Financial Times article noted that 10% of the population pays 90% of the overdraft fees. If you’re in that 10%, it’s time to start managing your money. If overdraft protection kicks in just once per month at $35 each time, that’s a savings of $420 a year. I can think of a lot of things I could do with $420 besides give it to a bank.

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