No matter how skilled you are at budgeting, everyone runs short of money from time to time. Part of budgeting is ensuring you have enough cash in your checking account to pay bills when they are due. If you run short of money, or a deposit is late and your checks are returned, you could be saddled with fees for insufficient funds, returned checks, and late payments. When money is tight, you must consider how to avoid overdraft fees.
According to a recent survey, as many as 64% of Americans live paycheck to paycheck, with little or no savings for unexpected expenses. When counting every penny, it’s very easy to overdraw your bank account without realizing it. All it takes is one delayed deposit or an unexpected expense, and you could be caught short of funds.
‘Oops! You have insufficient funds.’
It's not uncommon to spend more money than you have in your account, leaving you with a negative balance. Perhaps you forgot about an automatic withdrawal or scheduled funds transfer that left you short of cash. You may have an unexpected expense such as a medical bill or car repair. Maybe you just lost track of your expenses or forgot to account for the time it might take for a deposit to be credited to your account.
Whatever the reason for insufficient funds, the best way to avoid overdraft fees is by keeping a cushion of cash in your checking account so that you have a cash balance at all times. Set a threshold for your checking account balance so you always have enough money to prevent overdrafts. You also want to keep a close eye on your account, checking your balance regularly before making purchases that could trigger an overdraft. Signing up for automatic paycheck deposits can also reduce delays in cash flow to your account.
Luckily, there are many ways to avoid overdraft fees. You can always opt-out of overdraft protection from your bank or credit union. That way, the payment will simply be declined for insufficient funds rather than causing you to incur overdraft fees. But this may not be the best solution for everyone, since declined payments and returned checks will mean additional fees from creditors, and this could harm your personal credit.
Most banks and credit unions now offer alerts to notify you when your account balance is low. You can usually set the alert threshold between $25-$100. When your bank balance falls below the preset threshold, you may receive an email or text alert telling you your funds are low.
The simplest solution to avoid overdrafts is to sign up for overdraft protection. With overdraft protection, you are much more likely to avoid a fee for having insufficient funds.
How does overdraft protection work?
Your bank or credit union likely offers overdraft protection to protect you from overdraft and late fees if you spend more money than you have in your checking account. When you enroll in overdraft protection, the bank or credit union usually links your checking account to another source of funds. That way, additional money is automatically transferred from that other source when your checking account has insufficient funds.
Depending on the bank or credit union, you can use different types of accounts for overdraft protection. Most financial institutions link your checking account to savings, shares, or money market accounts. Some may use a credit card, a home equity line of credit, or a personal line of credit for overdraft protection.
It’s important to note that there may be fees for overdraft protection. Even if there is a fee, overdraft protection is still less expensive than an overdraft. For example, a bank may charge $10-$15 for an overdraft transfer, which is less than the $35 fee for an overdraft. With overdraft protection, the payment is honored, so you don’t have to go back to the creditor and issue a new payment. This prevents negative penalties on your credit score.
Some financial institutions even offer a grace period for overdrafts. If you receive notice that there are insufficient funds, you usually have 24 hours to transfer money or make a deposit to avoid overdraft fees.
If you are considering overdraft protection, be sure you understand how that protection is structured and what fees may be required, if any.
Shop for the best overdraft protection.
Managing your checking account, including cash flow, to ensure you have sufficient funds in your checking account is a fundamental part of personal money management. With today’s digital banking tools, it’s easier to keep track of your bank balance and transfer money into your checking account to avoid overdrafts. Sometimes, you may come up short. That’s when it pays to have overdraft protection.
When you consider opening a checking account, ask about overdraft protection. Understand what the terms are and if there are fees.
iQ works hard to protect you from overdraft fees. We offer a variety of overdraft protection features for our checking account members, including linked checking + savings, additional account linking options, courtesy overdraft protection, and card overdraft protection. Learn more about our options here.
If you are interested in learning more about the industry-leading features that are available with our checking accounts, be sure to check out our comparison guide today!