If you want to avoid over drafting your checking account then you should become a good money manager. You should know every single expenditure you have going out and make sure you log them into your check registry especially if you are on a tight budget.
First thing to do:
1. Be aware of every single expenditure even if this means writing them down this allows you to keep tabs on all your cash purchases and for all practical purposes it puts you in control of what happens with your finances. It also lets you know if you are to the point of over drafting your checking account.
2. Know what your income is. Matching your income against your expenditures is another way of keeping tab on your checking account balance.
3. When you use your debit/credit cards always log these into your check register. It is so easy to forget and not do it. That in itself is one of the biggest reasons for over drafting your account. Keeping accurate records can eradicate the over drafting your account.
4. Joint accounts. When you have two or three or more people on the same account and they are all using the debit/credit cards for purchases and cash advances and everyone is not communicating then this is a recipe for disaster and can cause you to overdraft an account. You really don’t know what everyone else is doing if they do not tell you.
5. Get Over Draft Protection. If you just think you cannot keep good records and don’t like to budget then you need overdraft protection. Overdraft protection is a line of credit which a bank extends to you. You have to apply for it and be approved just like any other loan. If approved you receive a line of credit from your bank which acts to protect your checking account from over drafting. Your line of credit can be anywhere from $200 on up to $2,000, and this can vary.
Here is how it works. Let’s say you have $50 in your checking account, but you write a check for $100. This puts you in the negative by $50 or in other words you have overdrawn your checking account by $50. Without overdraft protection you are charged a fee in the area of $30 or $32 depending on your bank. It could be more if other transactions come through while you are in the negative state and depending on how long you leave your account in the negative.
Let’s say you have overdraft protection and the line of credit is $500. Well if your checking account goes into the negative instead of you being charged a fee the extra funds needed, in the example above is $50, will be pulled from your overdraft protection account to keep you from over drafting you account.
Now when the check for $100 clears your checking account balance is now at zero because you pulled money from the overdraft line of credit. You now owe $50 to your overdraft line of credit.
The down side is the money owed on your overdraft account is subject to an interest rate of 18% or higher. Payments are pulled automatically from your checking account every month to pay your overdraft account and normally the payments are 2 or 3% of the amount owed.
There is also an annual fee somewhere in the area of $20 to have an overdraft account.
Also some companies will vary the amount they pull from the overdraft account. For example if you have over drafted your checking account by $50 exactly $50 in some cases will be pulled from the overdraft line of credit. Other financial institutions will pull money in increments of $100 from the overdraft account. So even though you only needed $50, $100 will be pulled from the line of credit which gives you a bigger balance to pay back.
You have to balance and judge what meets your needs and objectives to see if this type of account is right for you.