Avoid Being Charged Overdraft Fees

Once your bank account has suffered a negative balance due to anything other than a system complication, financial institutions penalize account holders with a charge otherwise known as an overdraft fee. Though this fee varies, it is frustrating and can easily mess up your budget. Most banks process the larger checks or transactions before the smaller ones because doing so will produce more overdraft fees. Therefore, it is important to keep track of your money, because it will seem like the 2.00 coffee you bought was really the purchase you are being penalized for, when in actuality you had many larger transactions earlier in the day! Here are several ways to prevent overdraft fees from happening.

Steps

 * 1) Don't rely on your "Available Balance." Many financial institutions engage in a practice where they will reflect your "Available Balance" but can not recognize transactions that come in after the end of the business day, or checks. Available balance generally reflects the money you have in your account available to you, but a common trigger of overdraft fees occurs when the transaction is actually posting (moving from a "pending" status to "posted"). Banks generally place a hold on your money for 3 business days if it's a credit purchase, and if the bank doesn't receive receipt of payment by then, they will release the money back into the account. However, when a credit purchase is made, the merchant has much longer than that to collect payment. Therefore, it is not uncommon to see transactions being withdrawn days after they were made, therefore throwing off the expected available balance.
 * 2) Balance your checkbook. If overdraft fees are a problem for you, then you're probably cutting it a little close in your budget, perhaps living from paycheck to paycheck. Not only will balancing your checkbook help you avoid overdraft fees, but it'll also give you a firm knowledge of how much money is in your account, which helps you prevent bounced checks and detect errors from your bank. The banks will even provide these free of charge to you, and most offer online banking that electronically calculates for you.  [[Image:Balance_checkbook004.jpg|400px]]
 * 3) Try the envelope system. Create a budget and divide your spending habits into several categories. Put the cash allotted for each category into an envelope for that category. Use the cash in the envelopes and once you run out of cash, that's it. Don't go to the ATM, don't use the credit card, don't use the debit card, don't write a check. Discipline yourself to stick to the budget. It might take a few months to get it down, but once you do, it's a sure-fire way to avoid overdraft fees. With this system, you simply can't spend money that you don't have.
 * 4) Create an artificial buffer. Decide on a certain amount that you will always have in your account, and never dip into. Let's say that amount is $100. You keep an eye on your actual balance and when it gets to $100, you stop spending. Period. You pretend that you've run out of money, and you never touch that $100. If your account has a minimum balance to avoid monthly fees, keep that amount "hidden" in your account and pretend it isn't there.  Actually subtract it out of your checkbook so that the balance you see is what you can spend.
 * 5) Research overdraft protection. If you have trouble keeping track of your expenses in relation to your actual balance, you may want to look into an overdraft protection program in which your main account is linked to a secondary account (like your savings account, or a line of credit). If your main account is overdrawn, money can be pulled from the secondary account and you don't get slapped with an overdraft fee. But, the effectiveness of this depends on two things:
 * 6) *You must have enough money in the secondary account to ensure that IT doesn't get overdrawn.
 * 7) *The overdraft protection program might have its own monthly fees. Are they worth it?
 * 8) *Beware because some banks charge a fee each time you dip into your overdraft account, albeit less than an insufficient funds fee.
 * 9) Opt out of overdraft fees altogether. Overdraft fees are actually supposed to be a service to you because it allows you to spend more money than you have at the time of purchase, so that when you make a purchase, you don't get declined (or so that your checks don't bounce,) and you are spared the embarrassment. But that "declined status" may be worth the $30 to you... Ask your bank about opting out of that service. You might have to fill out a little paperwork, but once it's done, you won't have any more overdraft fees. What will happen is that when you try to spend money that you don't have, your card will be declined on the spot. If you go this route, it'd be wise to avoid using your checkbook - they can't be declined, and bounced check fees can be just as bad as overdraft fees.  However, opting out of overdraft protection is not 100% effective.  There are certain transactions such as purchasing gas from a gas station, where the gas station simply debits a nominal amount such as $1.00 from your account immediately, and debits the true value of the transaction several days later, by which time your account may not have enough to cover the transaction, and your bank has to pay the money to the gas station so your account gets an overdraft fee regardless.
 * 10) Use a bank with a line of credit instead of an overdraft protection program. Some banks provide a line of credit that can be used if you go over your available balance. Typically a finance charge is applied to the amount of credit used, but it can be significantly less than an overdraft fee, resulting in a charge of a few cents instead of several dollars. Or, ask your bank if you are eligible for any credit cards to link to your account, often times they offer lower interest rates than others.

Tips

 * If your bank offers a balance notification service, use it. This goes along with the buffer concept - whenever your balance gets down to a critical amount, stop spending! You decide what that critical amount is. It might take a little trial and error.
 * Understand the fee structure. Each bank has policies enforced by federal law as well as self-established guidelines of their own. If asked, they will not hide answers to these questions from you. In fact, they usually explain the guidelines when you open your account. You may be accepting monthly fees in $3 or $10 increments unaccounted for in your budget. These small differences can determine a loss of income to wasted overdraft fees. Plus, it's just good sense to know what's being automatically deducted from your account.
 * If you have a good account history with your bank, the bank might, out of courtesy waive a limited amount of overdraft charges for you.
 * Try to see if the bank will eliminate a large amount of overdraft fees if you elect to open a savings account or apply for other services with the bank.
 * Join a credit union. Their fees are typically lower than those of a bank, and sometimes if you ask they will reduce or remove a fee if your account is generally in good standing.
 * It is important to remember that overdraft fees are intentionally high in order to encourage people not to overdraw their account. When a bank pays an item for which there is not sufficient funds they are taking a risk that you may not pay them back. Whether you do or not is beside the point-- as most banks are for-profit they demand to be compensated for the risk.
 * It is possible that, due to an overwhelming need for New Customers, a few banks may open an account regardless of whether you are on check systems or not.
 * Recent legislation prohibits excessive overdraft fees as usury (charging illegally high interest rates) ; you may be able to contest fees that go beyond what is permitted by law.

Warnings

 * Fighting with the bank teller and refusing to pay your overdraft charges is not a way out of this situation. A governing system among U.S. banks, known as Chex Systems, monitors account holders. Any customer who leaves a negative balance in their account for longer than thirty to sixty days is automatically charged off and reported. Your account will not only be closed, but you may take up to five years re-establishing your credit before another bank will take you in. Not to mention, you'll still owe the money!
 * If you are reported on Chex Systems, you will not be able to open a checking account for a period of time. The amount of time that you will not be able to open a new checking account varies by banking institution.

Related Tips and Steps

 * How to Balance a Checkbook
 * How to Evaluate a Credit Card Offer
 * How to Deal With Zombie Debt
 * How to Choose a Debt Management Program