How much money do banks generate via overdraft fees? Billions! According to Moebs Services, banks charged $32 billion in 2012, and then increased their take to $33.8 billion the following year. The average fee increased from $28 to $29 in the same time periods.
Overdraft fees have been a steady cash generator for banks for years, but they are 100% preventable. If you are diligent in managing your personal finances, there is no reason for you to have to pay these fees — because there is no reason for you to have overdrafts. Consider these simple steps:
- Check Account Balance Frequently – The phrase "balance your checkbook" is becoming archaic because people tend to use debit cards and automatic withdrawals and deposits more than checks. Still, somewhere there must be a ledger tracking the money flowing in and out of your account.
Virtually all banks allow you to instantly check your account balance, many through mobile devices. If you are not keeping track in your checkbook or your own ledger, you must check your balance regularly – not only to verify your balance, but also to check for unauthorized charges and potential identity theft.
If you are still using your checkbook ledger, make sure you enter regular automatic payments, as well as any debit card uses when you may not have your checkbook with you. Send an email or tie a string around your finger to remind yourself to update your ledger every time you use your debit card.
- Avoid Opt-In – The rules were changed in August of 2010 regarding some overdraft fees. Banks must now ask for your consent to charge overdraft fees on debit card usage and ATM withdrawals. We suggest declining this opt-in request.
If you have insufficient funds for any transaction, your card will be rejected for that transaction. Banks pitch these programs as a means of convenience and avoiding the embarrassment of a rejected card at a sales counter. This may sound appealing, but is the potential embarrassment worth the fees you will pay? You may even have the cash in your pocket to pay the tab, but will end up paying lots with this “convenience.”
Opt-in does not apply to checks, recurring debit charges such as automatic bill payments, or other electronic payments that are pre-authorized. Check with your bank to verify how these situations are handled.
- Maintain a Cushion – Whether it is $100 or $10,000, keep a cushion to cover the typical charges that you may not remember. Ask your bank what the minimums are to maintain your accounts without a fee and if they can set up text or e-mail alerts when your balance falls below your cushion level.
- Overdraft Protection – There are several ways to approach this, but most methods also have fees. Your bank may deduct a monthly amount allowing overdraft protection to a certain spending level. You may be able to link to a separate savings account for withdrawal. They may set up a line of credit on your card, or allow you to default overdrafts to your own credit card – but then you have potential finance charges.
However, none of these should be necessary if you monitor your account regularly.
- Timing – There may be time lags between your "available balance" and the actual funds in your account. Traditionally, check deposits may take several days to process, and the money may not be there if you are using an immediate spending method such as a debit card.
Also, vendors like car rental agencies, gas stations, and hotels place "blocks" against your card while transactions are finalized. The funds aren't moved from your account yet, but they are "reserved" for that vendor and unavailable for you to use anywhere else.
The best way to check this is online prior to new purchases – yet another reason to check your account frequently.
With a few simple steps, you should be able to avoid overdrafts and their fees, and spend your money on things you want instead, like a leather cover for that archaic checkbook!