Checking accounts come with a variety of fees. Some of the most costly fees are associated with not having enough money in your account. Sadly, just when you need the money most, you might get hit with this extra expense.
In their report, Data Point: Checking account overdraft, the Consumer Financial Protection Bureau (CFPB) found that account holders that opt-in for overdraft coverage pay over $250 a year in overdraft and non-sufficient funds (NSF) fees on average. This means, the overdraft protection, which people use to protect themselves, is actually costing them a bundle.
Surprisingly, the high cost of bank fees is carried by a small group of people. Only eight percent of bank customers pay 75 percent of all the overdraft fees. Since the median overdraft fee is $35, according to a 2015 update of the Pew Trust’s Checks and Balances report, that means these people end up paying seven to eight fees a year.
Avoiding fees is often just a matter of having access to money you’ve already earned. In fact, over 75 percent of people who overdraft make their account whole within a week. Building a small emergency fund or getting paid early using a service like Activehours, an app that lets hourly and on-demand workers access their pay before payday, might help people avoid overdraft and NSF fees.
What are all the fees?
Let’s talk about the difference between the three overdraft-related fees banks charge.
- Non-sufficient funds (NSF) or returned-item fee – This happens when you write a check, but there isn’t enough money in your account to cover the cost. In other words, your check bounced.
- Overdraft coverage – Want the bank to cover the transaction when there isn’t enough money in your account? Sign up for overdraft coverage. Be careful, though. In addition to charging a fee (around $35) for each transaction that overdraws the account, some banks charge ongoing fees until the account is made whole.
- Overdraft protection – Instead of the bank covering your overdraft, you can opt-in to overdraft protection. Just link a second account, such as a savings account or line of credit, to your checking account. If you overdraft, money is transferred from the linked account to cover the payment. You’re still charged a transfer fee (usually around $10), but it’s better than paying an overdraft fee.
Watch out for Reordered Transactions
Let’s imagine you have $40 in your account and have opted in for overdraft coverage.You make three purchases throughout the day:
- The first is a bagel for $3.
- The second, a 3D movie ticket for $15.
- Then, you go out for dinner and spend $50.
Since you’ve spent more than $40 and have opted-in for overdraft coverage, you’ll be charged a fee. Hold on, though. There’s more.
If the bank orders the transactions in the order you made them, you’ll only pay one fee. After all, you didn’t overdraw until you made the purchase in the evening.
However, if your purchases are reordered so that the $50 purchase goes first, you have to pay three overdraft fees – $105 total. After reordering, the first purchase depleted your account, and any other purchases would incur a fee.
Reordering transactions isn’t as common as it once was, but in 2015, Pew Trusts found that 44 percent of banks still reorder transactions making the largest purchases appear first.
Ask for forgiveness and you may get a refund
It pays to be good. If you regularly make on-time payments and have sufficient funds in your account, but you make a mistake once or twice, you can ask for a refund of the overdraft fee. Call the bank and tell them that it was a one-time mistake. They’re under no obligation to refund the fee – but, if you’re nice, you may get your money back.
Opting-Out may be best
The Overdraft Protection Law that went into effect in 2010 requires banks to allow customers to opt in or out of overdraft coverage or protection at any time. It may be best to opt out.
The downside is, if you try to make a purchase with your debit card when there isn’t enough money in your account, the card will be declined. However, this frustration sure beats paying fees.
Pro tip: Some banks make it easy to transfer funds from savings to checking accounts using a mobile app or with a text message. Do it yourself and save the potential $10 transfer fee.
Every once in awhile, you may bounce a check or be caught off guard by your recurring Netflix subscription. However, understanding bank fees, managing cash flow, and setting reminders for when your bills are due can help you make overdraft fees a thing of the past.
This article originally appeared on the Activehours blog.