Overdraft charges are typically triggered when an individual’s checking account balance drops below their agreed overdraft limit or below zero if there is no agreed overdraft attached to the account. Incurring overdraft charges can be extremely damaging for both your current bank balance and your credit score rating. This latter point is often overlooked but can have ramifications with respect to future attempts to get a mortgage or personal loan.
It’s clear, therefore, that avoiding overdraft charges should be a priority for anyone who holds a bank account. Before we consider tips for avoiding bank overdraft charges, though, it’s worth briefly outlining how overdraft charges typically work.
Charges for going into an unauthorized overdraft position:
It’s unfortunate that bank jargon causes some confusion in relation to overdraft charges. Overdrafts can be said to fall into two categories, authorized (or agreed) overdrafts and unauthorized overdrafts. If a person has been granted a $500 agreed overdraft and their balance drops to -$100, they will normally not be charged any fees although they will have to pay interest on the agreed overdraft amount.
In contrast, if a person’s balance exceeds their agreed overdraft limit (or drops below zero where they don’t have an agreed overdraft) then they will be said to have created an unauthorized overdraft and will be penalized, usually heavily.
When someone breaches their agreed limit, they will usually be hit first with a one-off monthly service fee. However, the real damage is often done if the person continues to transact on their account whilst in an unauthorized overdraft position. In such cases, the bank will have to decide whether to allow those transactions to go through. If they do allow the transactions, they will typically charge a paid referral charge for each allowed transaction. If they decline the transaction, they will apply an unpaid items charge. On top of this, the overdrawn balance will be subject to the unauthorized overdraft interest rate which is usually much higher than the agreed overdraft interest rate. All of this is very costly!
Tips for avoiding overdraft charges:
Clearly, the core advice is “don’t go into an unauthorized overdraft position”. However, that’s easier said than done and there are some mitigating actions that individuals can follow to reduce the likelihood of incurring charges.
– Request an agreed overdraft, to act as a buffer against charges:
Even with the most financially disciplined people, there are going to be times when unexpected costs crop up that put a real strain on their short-term finances. Having an agreed overdraft limit provides a buffer against charges and provides breathing space to get your balance back into the black. Just remember that your agreed overdraft is only there for emergencies and that you will be charged interest when you dip into it.
– Request text or e-mail alerts when you are nearing your account limit:
Banks are increasingly utilizing new technology to allow their customers to get text or e-mail alerts when their balance is nearing their agreed limit or has exceeded it. This can be invaluable in allowing you to transfer money across from savings accounts to avoid or limit the damage that would otherwise be incurred.
– Keep track of your spending:
Avoiding overdraft charges will always come back to the core point of living within your means and this requires spending discipline. The good news is that it’s never been easier to monitor what you’re spending, as you can check your balance through online banking, mobile phone banking, telephone banking, or via cash machines.
– Set up a budget:
Having a budget enables people to identify what their current spending levels are, compared to their income, and how they can reduce costs. A core component of having a budget is to set targets on how much you are going to spend on various spend categories, such as groceries, entertainment, travel, etc, and the discipline this brings greatly reduces the likelihood of going into an unauthorized overdraft.
– Speak to your bank before you go overdrawn:
It’s worth contacting your local bank branch if you know that you’re about to go into an unauthorized overdraft position. They are much more likely to be sympathetic if you have been open about your financial position and may be able to offer help and advice. One option you could explore would be whether they might be prepared to increase your agreed overdraft limit to stave off any unauthorized charges. Or, if you’ve been a long-time valued customer, and this is very much a one-off, they may be prepared to waive or refund the charges. It’s certainly worth asking even if the answer is no.
No-one wants to incur bank overdraft fees and we all know that they can be very costly. For some people, such charges can be a real cause of misery as fees pile up on fees that they can’t afford to pay off. Avoiding them should therefore be a fundamental financial objective. There are various ways in which individuals can guard against going into an unauthorized overdraft, including setting up an agreed overdraft to act as a buffer, following a budget, and tracking your balance and spending. However, it all eventually boils down to one inescapable fact; namely that we have to learn to spend less than we earn.