Overdraft Fees
Banks charge overdraft fees when the owner of a checking account spends more money than is on it. For example, if you have $50 in your account and use your debit card to buy something that costs $60, the bank covers the extra $10 but also charges you an overdraft fee for spending more than your balance.
When a transaction exceeds your balance, the bank covers the shortfall, so your payment doesn’t get declined. However, they charge you an overdraft fee, which is typically around $30-$35. These fees can add up quickly and become a financial burden, especially if you continue to make transactions without realizing your account is negative. Repeated fees can make it hard to get back on track financially.
The Financial Impact of Overdraft Fees
Overdraft fees don’t immediately strain your finances, but they’re still quite dangerous. These charges from your checking account build up over time. Before you know it, you will have several thousand just in overdraft fees, which will snowball into further financial difficulties.
The main impact of overdraft fees is the immediate reduction of your available funds. For instance, if your account balance is low and you incur an overdraft fee of $35, this fee is deducted from your balance. This could cause another transaction to overdraft and incur another fee. If you don’t immediately stop reckless spending, the cycle will continue.
Continuous overdraft fees put a lot of strain on your finances, especially if you live paycheck to paycheck. If you spend a large chunk of your income paying off these fees, you will end up with less money even for essential expenses like rent, groceries, and utilities.
When overdraft fees are deducted, they lead to a negative account balance. When the account balance goes into red, it leads to additional fees. Extensive overdraft fees will put you into long-term debt if you don’t replenish your negative balance quickly. You will have to deposit enough money to cover the negative balance and any new transactions.
Overdraft fees do not directly impact your credit score, but the financial stress they cause can cause behaviors that do. For example, if you are unable to pay bills on time or must rely on credit cards to cover expenses, your credit utilization rate increases, and you might miss payments.
Money that could have been saved or invested for future needs is instead used to cover overdraft fees. You won’t be able to save funds for a rainy day, plan for large expenses, or afford something long-term, like retirement.
How to Avoid Overdraft Fees
To avoid incurring overdraft fees, you should start managing your finances proactively.
- Regularly monitor your account balance to check available funds before making transactions.
- Set up account alerts that notify you when the balance becomes dangerously low.
- Create a strict budget to limit your expenses and don’t break it unless necessary. This way, you will always have enough money to avoid overdrafts.
- Remove overdraft protection to simply not have any transactions that exceed your balance, which will prevent overdraft fees from accumulating in the first place.
- Connect your checking and savings accounts for automatic transfers. If there are not enough funds in your checking account, you will use the little emergency money from savings.
By following these steps, you will avoid overdraft fees in the future and become better at managing your finances.