Many credit union members around the country may have heard the infamous $40 cup of coffee alluded to in recent financial news. If you have not, it refers to how a $3 latte can turn into a $40 headache if a consumer overdraws on his or her checking account during a debit card transaction, getting hit with a hefty fee. In this case, $3 is going to the coffee shop and $37 is going to the financial institution!
The proverbial $40 cup of coffee is just a microcosm of the income being earned by financial institutions as a result of overdraft protection penalty fees on checking accounts.
According to money.cnn.com, in 2008, the Federal Deposit Insurance Corp. released a report into banking overdraft programs which found that consumers who overdrew 20 or more times per year paid an average of $1,610 in overdraft fees.
The 2008 FDIC study also found that 46.4% of young-adult bank customers were hit with overdraft fees and of those, 15% recorded more than 10 overdrafts in one year. Fast forward to 2010, according to research firm Moebs Services, banks collected $33.1 billion in revenue from overdraft fees and $29.5 billion in 2011. And, although FIs claim overdraft protection plans are in place to eliminate the embarrassment of a declined debit card or bounced check, sometimes consumers do not realize what type of fees come along with this protection, until the damage is done.
While no one in their right mind would willingly or purposely pay $40 for a cup of coffee, many consumers are 1) unaware that their account is overdrawn, and 2) unaware of their bank or credit union’s overdraft policies. Therefore, consumers need to protect themselves. Whether you are someone with a history of overdraft habits, someone who lives paycheck to paycheck, or even someone with good money management skills who wants to continue on the up and up, there are some simple steps you can take to be a responsible checking account holder and avoid overdraft fees.
6 Tips to Avoid Overdraft Fees
Keep tabs on your finances. Balance your checkbook and/or track all of your accounts online. This process, while somewhat mundane, will help you to be aware of what is going on, not overspend, and prevent overdrafts from happening altogether. Transaction register books can be obtained, usually free of charge, from any bank or credit union. Remember to track your checks as well as any debit card purchases.
Link your checking account to a savings account, and only use overdraft protection in an emergency. Should you overdraw on your account when making a purchase, your FI will take the necessary funds from the savings account. You should be aware that there are limits, associated with Reg D, which affect the number of withdrawals from a savings account. If you do plan to opt into an overdraft protection plan (ODP), you may want to consider joining a credit union if you don’t already belong to one. They generally offer lower overdraft fees than banks. However, regardless of your FI, if you see that you are abusing your ODP, then you can always opt out.
Avoid Point of Sale (POS) and small purchases. Although you may be avoiding ATM fees by withdraw ling cash at a point-of-sale terminal, you may incur an overdraft fee. Reason being that a retailer will not let you know you’ve gone over your limit and as such, these transactions lead to nearly 40% of overdraft fees. Charging small purchases on your debit card is another culprit since you might forget about them. However, they can add up and easily get out of control. A better option would be to have an allotted amount of cash for such purchases to use on a weekly basis.
Communicate with your FI. By having a good relationship and keeping the lines of communication open with your bank or credit union, you have a better chance of talking your way out of an overdraft fee, should one occur. If you are generally a responsible account holder, FIs recognize that everyone makes mistakes and will work with you to reverse the fee.
Use technology to monitor accounts. Many FIs are constantly updating the technological features of their accounts, especially in terms of e-alerts. If offered, it’s a great idea to sign up to receive an alert via email or text that will let you know when your account balance falls below a certain amount. If your FI does not offer such a feature, check out a free monitoring service such as Mint.
Set up an emergency fund. Rather than using ODP as a crutch, do your best to save some of your hard-earned income in a back-up account. During these tough times, when many people are just keeping their heads above water, the idea of saving seems almost foreign. However, if you can swing it, it is an ideal way to not only eliminate overdrafts but also debt. Get more details on beginning your emergency fund.
Although many consumers have been relying on overdraft protection due to the economic downturn, you owe it to yourself to break this cycle and gain some financial freedom. By taking a few practical steps to avoid overdrafts and their wasteful fees, you can put some of those precious dollars toward expenses and savings.