We've all had those moments, when you go to the ATM to get cash, knowing there's only a 50/50 chance that you'll actually have enough in your account to cover what you need.
That might be why you choose to opt into your bank's overdraft protection service, because you just never know when you might need a little help covering your costs. But here's the rub: The overdraft fees you pay to protect your bank account might be doing you more harm than good.
Americans paid $15 billion in overdraft fees last year, according to a recent report from the Consumer Financial Protection Bureau (CFPB). The average amount people overdraft when using their debit cards is only $24, which they usually pay back within three days — but the typical overdraft fee is $34.
So get this: Paying $34 to borrow $24 for three days is tantamount to taking out a loan with a 17,000% annual percentage rate, according to the CFPB.
To help cut down on overdraft fees, federal regulators passed a law in 2010 that required banks to let consumers opt into paying for overdraft protection, rather than making it automatic. But because the language surrounding it can be confusing, many consumers don't even realize what they're opting into. As such, the CFPB is pushing banks to spell out their overdraft protection policies and fees in plain English.
In the meantime, it's probably best to switch off overdraft protection, according to some financial planners from LearnVest Planning Services. "Not only are the fees of major concern, but so is the fact that [someone] may not know that they are overdrawn," says David Blaylock, CFP®.
Instead, avoid the fees with these tips for staying on top of your checking account balance.
Use account balance alerts. "Make sure to set up an automatic reminder from your bank to let you know if your balance falls below X dollars," suggests Matt Shapiro, CFP®. And if your bank sets a minimum balance you have to maintain, then considering setting the alert for that amount, so you don't incur yet another fee from your bank, suggests Natalie Taylor, CFP®.
These types of alerts not only help you determine if you need to transfer more money into your account; it will also let you know if you need to curb your spending until your next paycheck hits.
Stop auto-payments on big bills. While automated payments can help make paying your bills super convenient, it can also backfire if certain bills keep hitting your bank account at the wrong time.
If that's the case, either change the day your auto payment occurs, or start paying your bills manually so you're more aware of what's coming in and going out of your account. Otherwise, you could rack up what's known as a non-sufficient funds (NSF) fee, which is what a bank charges you for having to reject a check or auto-payment because you don't have enough money to cover it.
Rethink your budget. Let's be real. If you're having to pay overdraft or NSF fees on the regular, then there's a deeper issue here: You're not living within your means. It might be time to reexamine your bills or expenses to see what you can cut back on so you have more breathing room in your budget. Either that, or it's time to bring in more income, whether that's through a higher-paying job or a side gig to supplement your paycheck. If you're not even sure where to begin when it comes to crafting a budget, check out our cheat sheet on the One-Number Strategy.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.