How to Protect Yourself from Overdraft Fees

These days, fees are a common feature of daily life. We pay fees when we order takeout from our favorite restaurants, need a lift to the airport, or book a vacation rental. And while some fees are generally accepted as the necessary price we pay for convenience, overdraft fees can be avoided with a little forethought and financial planning.

Your financial institution will charge an overdraft fee when there are inadequate funds in your account to cover your transactions. You can think of the fee as a temporary loan that allows you to continue covering bills or withdrawing funds even if you’re account is empty. And while this coverage can be useful in case of an emergency (hello, flat tire!) overdrafts translate to penalties and interest and should be avoided whenever possible.

Many institutions charge as much as $35 for overdraft fees, and a frustrating and common scenario is learning about the fee only after it pops up on your monthly statement. Here are several steps you can take to safeguard yourself from unwelcome surprises:

Financial institutions are required under Federal law to disclose any fees they charge in connection with your deposit accounts. Reach out to your institution and request any disclosures and fee schedules that outline when you receive a penalty charge. Overdraft fees (in which the bank issues a fee but covers your transaction), non-sufficient fund (NSF) fees (in which the bank issues a fee but declines the transaction) and daily overdraft fees for each day that your account remains overdrawn are all scenarios you’ll want to be aware of.

It’s a good idea to get in the habit of regularly monitoring your account balances to help avoid overdraft fees and non-sufficient funds (NSF) fees. Consider signing up for low balance alerts through your financial institution. These alerts act as a safeguard, letting you know when you are at risk of overdrawing your account. You can also sign up for a budgeting app which can boast added benefits like setting up bill payment reminders, helping eliminate unwanted subscriptions, or syncing finances with a partner.

Linking a checking account to a savings account can help reduce the chance of overdraft fees. If your checking account is overdrawn, money will be automatically withdrawn from the linked savings account to cover the transaction (if there are sufficient funds). Just be sure to find out whether you will incur any transfer fee. Generally, transfer fees are lower than overdraft fees. 

If you’re feeling stressed over the prospect of incurring overdraft fees, one option is to opt out of overdraft coverage for debit card purchases or ATM withdrawals. Without overdraft coverage, your card will be declined in the transaction. When the transaction can’t be completed, you won’t incur an overdraft fee. 

Just as annual medical check-ups are an important step to take in preventative health, so too are regular check-ups on your finances. It’s good practice to set aside time every month to evaluate your budget or create a budget if you haven’t already. Assessing your income, current bills, and discretionary categories where it may be possible to minimize spending (for example streaming subscriptions or food delivery) will help reduce the chances of being caught unaware by low funds.

Building financially healthy habits begins with having access to the right resources. Need a good place to start? Creating a free LearningLabLearningLab+ account only takes a second and provides immediate access to a library of online financial education courses that you can utilize anytime. GreenPath’s popular CheckRight course is a great place to kick things off. You will learn:

• The basics of opening a new checking account
• Good checking account practices (including tips on minimizing overdrafts)
• Options you have if you’ve experienced financial challenges in the past and are needing a fresh start with checking

And if you’re already feeling good about your financial picture, we’re happy to offer free worksheets and resources that can help maintain the habits you’ve put into practice. When it comes to personal finance, there is never a one-size-fits-all approach—GreenPath meets you where you are now, and helps you get to where you want to be.