What are overdraft fees and how can I avoid them?

Simple steps to prevent costly fees.

Overdraft fees are incurred when a person performs monetary transactions that exceed the available balance in their checking account. This can occur by writing a check or authorizing an electronic deduction from your checking account that exceeds the available balance. If your bank or credit union actually chooses to pay or cover any of these transactions, you can expect to be charged an overdraft fee which averages around $30. If your financial institution decides not pay or cover these transactions than you might be charged a “non-sufficient funds charge” (NSF) per occurrence, as well as possible returned check fees from the merchants that did not receive their payment.

The Federal Deposit Insurance Corporation (FDIC) suggests two ways to avoid overdraft fees in automated overdraft programs:

  • Monitor your balance. Keep track of the money that goes into and out of your checking account on a regular basis. A paper check register that you should be able to obtain from your bank or credit union, will allow you to keep track of the following: deposits, written checks, ATM withdrawals, debit card purchases, electronic debits for bills and any account-related fees. There are other types of tracking options including computer programs, excel spreadsheets, etc. By keeping track of your balance on a regular basis you have a better chance of not overspending which can lead to numerous fees. If possible, it might be helpful to keep a little additional money in your checking account to help prevent unplanned overdrafts. Please note that some deposits are put on “hold” so make sure that your deposits are available in your account before making large withdrawals or writing large checks.
  • Link your checking account to another account: Checking accounts can be linked to savings accounts. If a person does not have enough money in their checking account to cover a transaction, then the bank or credit union will transfer funds from your connected savings account (only if there is money available in the savings account) to cover the transaction. While there may be a small fee charged for this transfer (check with your financial institution), this option can prevent costly overdraft fees if there is enough money in the savings account to cover the transaction. There are other types of accounts that checking accounts can be linked to, and these include lines of credit or small loans. Contact your financial institution to see what products and services they offer to avoid costly overdraft payment programs/options.

If you have concerns or problems regarding your account that you are not able to resolve with your financial institution, then contact your banks federal regulator. For assistance in obtaining this information contact the FDIC’s Consumer Assistance Line at 1-877-ASK-FDIC (1-877-275-3342) or www.fdic.gov/consumer.

For more information on this topic, visit the Federal Deposit Insurance Corporation. For additional financial resources, including education workshops visit the Michigan State University Extension website.

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