How to avoid bank overdraft fees

Last fall, I discovered my Quicken data file from the mid-1990s. It contains all my transactions from 01 January 1995 until 06 April 1998. There are many fascinating insights to be gleaned from my crazy spending a decade ago, but as I was looking through my checkbook register, one thing in particular stood out.

Before nearly every paycheck, my bank balance would dwindle to $12.33 or $7.14 or something similar. When I was paid, the balance would shoot up for a day or two, only to be spent right away. Sometimes, in fact, I overspent. During these 3-1/2 years, I racked up a couple hundred dollars in overdraft fees.

On one particularly bad day, my bank socked me with three overdraft charges at once. When the notice came in the mail, my stomach sank. How could I be so stupid? Speaking as one who's been there, overdraft fees are an indication that you're not tracking your finances as closely as you think you are. Tracking finances only through receipts, or only through your bank's web site is inadequate. You need to keep a separate ledger (perhaps a checkbook register) or use a piece of software (such as Quicken) in order to track every expense.

If you live paycheck-to-paycheck and fail to track every expense, you will experience overdraft fees from time-to-time. It may be more convenient to track your expenses only through your bank's web site, but if you do so, you must understand there are always going to be checks and other transactions “in process” that don't show online, and consider overdraft fees the price you pay for adhering to such a system.

There are other ways to compensate for chronic overdrafts, of course:

  • Banks offer overdraft protection, which is usually linked to a secondary account (such as a savings account). This is an excellent option for those who repeatedly suffer overdraft fees but are unwilling to record every transaction as it happens. But be careful. These options sometimes carry fees of their own.
  • Many people create an artificial buffer to prevent overdrafts. At one time, I had a $100 in my checking account that I would not allow myself to touch. If my balance fell below $100, I just stopped spending. I wasn't overdrawn in the bank's eyes (and thus did not receive a fine), but I was overdrawn in my eyes.
  • One of the cool features of Quicken Online is its “real balance”, which displays how much you actually have available, not how much your bank thinks you have available.
  • Use an envelope budget system to be sure you do not overspend. The bank will happily let you become overdrawn at the grocery store, but when you're using a fixed amount of cash (as in the envelope system), it's impossible to spend more than you have.
  • Become familiar with your bank's overdraft policies. There's no question that an overdraft is your fault, but as the Center for Responsible Lending notes, prevailing overdraft practices artificially drive up fees. Know how your bank handles overdrawn accounts.

If you suffer from chronic overdrafts, it's time to re-evaluate your money habits. If you're a shopaholic, learn to curb compulsive spending. In any case, begin tracking every penny you spend. Good record keeping may not cure your financial woes, but it can help reduce your chances of becoming overdrawn.

And don't forget the number one tip for avoiding overdraft fees: Don't buy stuff you cannot afford!

This post was requested by Mary. If you have a topic you'd like to see covered at Get Rich Slowly, drop me a line!

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B Smith @ Wealth and Wisdom
B Smith @ Wealth and Wisdom
12 years ago

My way to resolve was to always balance my checkbook to the penny and never went to a zero balance. Always, no exceptions. As I grew my savings I kept more and more in my checking account until I had a significant buffer. As a result I have not paid a bank fee in 15 years. And I’ve never needed to use my overdraft protection.

Dreamer
Dreamer
12 years ago

Let’s not forget the absolute foolproof way to avoid overdraft fees: Opt out of “overdraft coverage”, or whatever your bank calls it. It’s not too hard. Call your bank, tell them that you don’t want the “privilege” of paying them to cover an overcharge on your account. They’ll send you some paperwork to fill out, and voila! Next time you try to write a check or use a debit card to buy something you don’t have the money for, it will be refused (or bounce. Don’t forget that most businesses have their own charges for returned checks.) Upside: No overdraft… Read more »

Trevor
Trevor
12 years ago

I think tracking every expense is unrealistic. I’ve tried many times and it never lasts, but I believe in the efficiency of computers (ima programmer), and their potential to do this mundane task for us automatically. I also think that banking websites suck in general and don’t replace tracking your own expenses. But I started using mint.com and am pretty happy with how that gives me a good idea of my overall finances.

So Cal Savvy
So Cal Savvy
12 years ago

I had variable income during college, and so I also keep a buffer in my accounts (that was in my eye’s consider an overdraft if I touched it). What I did was I signed-up for the free balance reminder service. Whenever my account is below a specified amount, I get an email so that I am more aware of the situation. You can also get this same service to text message you.

andie
andie
12 years ago

JD, I’ve been an avid reader of your blog since December. Keep up the great work! I’m addicted! In regard to overdraft fees, I must admit that I was having to pay my bank outrageous OD fees over the past 4(?) years to curb my wild spending habits. I cannot say how many hundreds or thousands of dollars I might as well have just thrown into the street. I’ve just turned 25 and have been trying to get my act together financially. I had vowed for the year of 2008 to not have *any* OD fees, but that plan failed… Read more »

Richie
Richie
12 years ago

The rash of $30+ late fees I racked up in the past year is what inspired me to get serious about my money management, debt reduction and budgeting.

I’ve been on a fairly strict plan for the past 2 months.

Jason
Jason
12 years ago

Another solution is to stop writing checks.

I pay all my bills through BillPay. If I have a need to send a check, I use the check-writing service from my BillPay.

It will only make payments or send checks if I have funds available, so I’m unlikely to become overdrawn.

(Oh yeah, I only use cash, so I avoid over spending with the debit-card, too.)

Steve
Steve
12 years ago

I buy almost everything with a credit card (for better or worse). I rarely or never use checks. Between those two I have very few transactions that aren’t initiated through my bank’s web interface, and as such I have been using said web interface to track the balance with success for a few years now. Even if I do overdraw, my credit union only charges $1 to cover the overdraft from my savings account.

smartfather
smartfather
12 years ago

Great post! If you do happen to incur an overdraft charge you could try talking to your bank and ask if they could reverse. We had a mishap a couple of months ago and got hit with 6 charges!!! I went in over a month later and asked if there was anything that they could do and I got 3 of them reversed. I was content with that.

Eric J. Nisall
Eric J. Nisall
12 years ago

I think the most important thing you mentioned is that good recordkeeping will certainly help reduce overdraft fees. I must disagreee with Trevor, however regarding tracking every transaction. By using Quicken or Microsoft Money, you can import every transaction that the bank has on file, enabling you to see what has/has not cleared while also seeing your true available balance in the register. It is quite simple to do and very easy as well. And, for all those that claim to be too frugal to go out and spend the money on a program, think of it this way: by… Read more »

Keith Lauren
Keith Lauren
12 years ago

Get a checking and savings account with ING. They don’t have overdraft fees. If you drop below zero, they just charge you a % of the overdrawn amount until it’s back up to zero, just like a loan. It’s a really good deal.

Caitlin @ C³
Caitlin @ C³
12 years ago

“It may be more convenient to track your expenses only through your bank’s web site, but if you do so, you must understand there are always going to be checks and other transactions “in process” that don’t show online, and consider overdraft fees the price you pay for adhering to such a system.” Eh? What bank do you use that they don’t display your transactions almost instantly? Even my credit card shows a change in balance only a few hours after being charged (the actual details take a couple days to go through, but the balance display changes). I don’t… Read more »

Jimmy @ MoneyRemix
Jimmy @ MoneyRemix
12 years ago

I have a savings account linked to my checking account that protects me from overdrafts (fee-free). Fortunately, I’ve never had to use any of the money to cover an overdraft, but if my checking balance ever gets below a certain threshold, I’ll transfer a couple hundred dollars over to tide me over until pay day. When I get paid, the very first thing I do is repay the money I “borrowed” from my savings account.

Rich
Rich
12 years ago

Like Steve we put almost everything through the credit card. We typically only use three or so checks a month. One for rent, one for church donations and one for the baby sitter.

Since we only have those three to keep track of, the bank’s website is a pretty accurate reflection of our current state of affairs.

We tried keeping receipts several times, but they always end up as crumpled balls in my pockets and in my wife’s purse.

Whitney
Whitney
12 years ago

This very blog introduced me to You Need A Budget (http://www.ynab.com), and it has been a life-saver for me over the past year. I used to use Quicken and track everything via receipts, but that was a real hassle and I would invariably miss something and have overdrafts. Now I track using my credit union’s web site, but I have the YNAB buffer and any overdrafts this month come out of next month’s money (which is already there). The whole process takes me less time and gives me better results. One caveat: I am not a good money manager and… Read more »

missliliane
missliliane
12 years ago

I just don’t use a bank card, and the only checking transactions I have each month is 1 check for rent and electronic withdrawals to pay my CCs in full each month.

I keep a large buffer in there anyways (normally about $2k, in case I’d need to pull a large amount of cash for something), but I’d rather use plastic. Especially with two people on one account; I’d hate to get an overdraft because DH didn’t tell me he spent $500 somewhere.

J.D.
J.D.
12 years ago

Caitlin wrote: What bank do you use that they don’t display your transactions almost instantly? Well, from my experience, all banks delay some charges. I don’t actually think it’s the banks, though. I think it’s the merchants. My suspicion is that point-of-purchase debit transactions are processed instantly, but that all others (credit transactions, checks, and some debit transactions) have a lag to them, ranging from a few minutes to a few days. Just this morning I reconciled my bank accounts. My primary checking was off because a transaction from Friday had not yet been processed at the bank. This happens… Read more »

Michelle
Michelle
12 years ago

Oh man, what a great post. I used to overdraft not infrequently w/ US Bank for what I thought were bullcrap reasons — ING funds transfers being a big one. I kept it relatively in sync w/ quicken but wasn’t completely financially aware. The worst part is that US Bank charged me $35 every time I overdrafted!!! What a punch in the stomach. The last straw was one day when I bought something in the morning, the same time when my paycheck was going through direct deposit. They ‘held’ the paycheck longer than they held the transaction approval for the… Read more »

Dom
Dom
12 years ago

I work for a bank and it boggles my mind how many people overdraw their accounts. I check my account balance every single day; then I compare it with Quicken. I use my credit card (which I pay off every month) for everything except for the few bills that can’t be paid with a credit card. When looking at online banking, most banks display a ‘bank’ balance and an ‘available’ balance. The bank balance is everything that has POSTED to your account; that’s the opening balance for the day. The available balance SHOULD change as credits and debits happen throughout… Read more »

Sara
Sara
12 years ago

I trained myself to feel broke when my account dipped under $800 (the largest check I would write). It’s not a perfect system, but it can work for lots of folks once they get a chance to build that cushion.

nbdean
nbdean
12 years ago

And, for all those that claim to be too frugal to go out and spend the money on a program, think of it this way: by saving one overdraft charge from ever occurring, the program pays for itself!

For those too frugal to buy a program, there are free and open source alternatives that probably suit the needs of most individuals. Just because something saves you money (overdraft fees) doesn’t mean you need to let it cost you money too.

If all you need is transaction tracking, a simple spreadsheet will do as well (or your checkbook register, of course).

Dena
Dena
12 years ago

I use Quicken too. It’s great, and I’ve never had a problem because I always know what I have to spend. It’s also nice because you can input those automated monthly withdrawals ahead of time, so that you don’t forget.

cmb
cmb
12 years ago

Another thing to look out for is how your bank processes items. Some will first apply all debits incurred in a day, and apply credits afterwords, meaning even if a deposit covering all your transactions clears on the same day you can still incur overdrafts. Some will process items from largest to smallest amount, under the guise of doing what the customer wants (you wouldn’t want your house payment/other important big item to bounce!) but the reality is that adds up more overdraft fees. The real solution of course is to keep track of things and don’t overdraft, but also… Read more »

Jen
Jen
12 years ago

It’s all about the originality, ya gotta use Glyphius.

elena
elena
12 years ago

A $1000 buffer in our joint checking account has worked for us. Two people, two cars, pets, older house: stuff happens we can’t plan for and this smooths out most of our small to medium cash needs. Even when we plan well, our cash flow doesn’t work as neatly or evenly from month to month as we would like. It is not unusual for us to be a little under or over any given day just the way the paycheck/ billing cycles happen to overlap that month. Additionally, higher than expected bills, smaller than expected paycheck, or neglecting to record… Read more »

Funny about Money
Funny about Money
12 years ago

This has got to be an award-winning post! Over here in my precincts, I have three strategies for avoiding an overdraft: 1) Keep a $500 “cushion” in the account and consider that amount the same as “zero.” Keep track of all expenditures in Quicken. As I approach a balance $500, I know I’m getting close to broke. And yup, occasionally the amount the bank says I have drops to $480-something. I’ve overspent, but I don’t get an overdraft gouge. 2) Minimize checking account transactions. Never withdraw cash though ATMs; do not use cash at all. Budget a specific amount for… Read more »

Tiffany
Tiffany
12 years ago

You posted this post at a great time! I recently overdrafted on my account only because a company I paid decided to pull money out at their convenience and waited longer than (I felt and my bank agreed) needed. It was the first time that it ever happened from them since I deal with them every month. My mom had to explain the whole “hold checks” process since that freaked me out as well. I have never used a checkbook and my attempt to not have to buy Quicken is slowly backfiring. I guess I’ll have to learn them both… Read more »

monika
monika
12 years ago

Another easy way I track is whenever I deposit a check I do not consider it money in my account till the bank actually credits it. For any check issue / withdrawal, I consider it withdrawn the day I issue it. This way, the only buffer in my account is the “bank float” and yes, the banks do try to sneak in a fee once in a year or 2 years for something, but, they waive after I call them and talk through it with them.

Prevent Overdraft Fees
Prevent Overdraft Fees
12 years ago

While it’s true that we’re all responsible for properly handling our finances, banks’ “biggest check first” policy is one of the main reasons why a transaction that would normally result in just one overdraft fee ends up generating several ones.

Mike
Mike
12 years ago

The foolproof solution is to decide you’re not going to spend money when you don’t have it, and then stick to the plan.

Trust me, if you end up with an overdraft fee, then it means you deviated from the plan– which is to say, you didn’t follow my foolproof advice. In which case, don’t blame it on the advice– it’s not the advice’s fault!

I know it sounds simple, but it works.

Teaspoon
Teaspoon
12 years ago

I had a hard time with overdraft fees for a while when I was in college a few years ago. I was using Wells Fargo at the time. Of course avoiding overdraft fees altogether is the preferred solution, but part of my solution was to switch to a credit union. The credit union I used then–and the one I use now that I’ve moved–charged only $5 per overdraft, which was relatively painless compared to what Wells Fargo and other large banks charge. Since all my savings is in an online ING account anyhow, moving to a credit union didn’t affect… Read more »

ericnNC
ericnNC
12 years ago

personally I don’t know how anyone could overdraft a checking acct, when you have a register to track your expenses. Even if I use a POS debit purchase, or atm withdrawl, i still write it down. So if you ever get close to zero you’d have to assume the likelihood of OD’ing would be very high. Due to the fact my math sucks at times, I even started ’rounding up’. So if i write a check for 17.01, 18.00 gets deducted from the register. It’s easy math and at the end of the year around christmas time I actually reconcile… Read more »

VinTek
VinTek
12 years ago

Note that banks are raising their penalty fees for overdrafts.

http://www.usatoday.com/money/perfi/basics/2008-06-17-bank-fees_N.htm

Swamproot
Swamproot
12 years ago

I only write checks or have drafts from my checking account that are planned the month before. For debit card transactions, I use my ING’s Electric Orange account. They gave me (and I think about everybody who signs up) a $165 buffer on their account where if you dip into it, you only get charged on the interest (11%) for that deficit amount until it is back in the black. No overdraft fees unless you blow through the buffer. You can even apply for a bigger buffer, but I didn’t want to tempt myself. I have occasionally dipped into it… Read more »

Carla
Carla
12 years ago

I ask – What good does it do to know your account has a zero balance, when you have nothing to add to it???????? My husband and I have a business and these days we are struggling with a capital S. I feel overwhelmed……..

sugitha
sugitha
12 years ago

To avoid Overdraft first we have to make one clear excel sheet with full of credit and debit details, that very helpful to know our bank balance on every particular date, we can handle our bank balance clearly.

Krystal
Krystal
12 years ago

Hi JD- Correct me if I am wrong, but I think there are some consumer advocates out there fighting banks “lining up” transactions to make sure the biggest purchase goes through first, which can sometime cause an overdraft fee, then every latte, take out for small amounts of money can also over draft the account, causing multiple overdraft fees, regardless of the order the purchases were made in (within a specific time frame, I assume). Maybe it might be time to revisit what is going on with banks and the overdraft fees as of recent, as it seems to be… Read more »

Annoyed
Annoyed
12 years ago

BOA and the other banks all have the same policy and I’m not buying the “can’t set the $500 limit to $0” party line. So far this year it’s cost me over $800 to bank with them. I switched to INGDirect who don’t charge a $35 transaction fee, they do charge 9% interest on on any overdraft amount. The only way to make banks listen is by voting with your cash and banking elsewhere.

Peter
Peter
11 years ago

Yeah well, I overdrew by $18 due to a mistake with PNC Bank, where I went to Starbucks twice. They charged me $70 (two overdrafts), $20 (continuous overdraft charge), and $40 (fee to close my account.) So they charged me — IN ONE MONTH — $130 on a $18 overdraft. Now they’re reported me to chexsystem because I refuse to pay the $130. I am a student and just don’t have $130. SO there it is, my credit is ruined and I can’t have a bank account. So for all you jackasses who talk about “responsibility” — why don’t you… Read more »

Fed Up With Bank Fees
Fed Up With Bank Fees
11 years ago

I couldn’t agree more with Peter. He said it plain and simple. The best laid plans for “cushioning” your account or any of these other BS solutions are worked around by banks that spend a great deal of time finding ways to impose these huge fees that suck up your entire pay check leaving us with nothing to pay bills with. And people wonder why this country is in financial trouble. Why are these banks and CC companies allowed to keep charging people huge fees when odviously they are short on money or they wouldn’t be overdrawn in the first… Read more »

Lee in Felton
Lee in Felton
11 years ago

There is no excuse for banks charging outrageous “fees” on check cards when they may be simply declined for insufficient funds.

Make no mistake. This is usury, which is a crime. The banks are stealing from those least able to afford, with the least power to protect themselves.

However, you can take your bank to small claims court. There is a filing fee, but the bank will settle, (because a court case will cost more). They will pay your fees, including the filing fee (you must ask them to do that), and you can close your account.

Bob Giltner
Bob Giltner
11 years ago

I am sick of overdraft fees and finally found a bank that does not charge them. Check out free advice I found on getting refunds and avoiding bank fees at http://www.timtheoverdraftexpert.com.

eveinthegarden
eveinthegarden
11 years ago

My way to avoid OD fees is I’ve just use CASH for the last three years. I have a little debit card that I have for my kids child support and if I need to do anything electronically I’ll use that. I was woo’d into getting a checking account by BOA and they just charged me 3 OD fees for purchases I made that there would have been money to cover if the kid at the airport checkin hadnt charged me a double unaccompanied minor fee. I caught the double charge but not till AFTER he’d billed my account. So… Read more »

Angela
Angela
10 years ago

With US Bank, I have incurred fees for speaking with reps on the phone. I noticed it seems to depend on what is discussed, but couldn’t find anything about this anywhere, and no one ever gave me a satisfactory answer, so I stopped calling them. Their overdraft fees are terrible. Today, I was charged $225 in overdraft fees alone because my paycheck (direct deposit) came one day late. There was one charge that exceeded my balance, my car insurance (can’t be stopped or changed or I have no insurance – illegal in my state) for $89. This posted the 11th.… Read more »

Jayne
Jayne
6 years ago

It is virtually impossible to track every expense in my fast pace world, even when I tried it by rounding up to the nearest dollar just for speed, it didn’t work for me–and when my husband and I shared the main checking account it was impossible! With the checking account I have now, I’ve found the most beneficial feature is the “Keep the Change” program I opted for. Whenever I swipe my debit card, they round it to the next dollar for me, and transfer the change to my savings. It’s probably about $30-$50 (in addition to what I have… Read more »

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