Ask a Nerd: How Can I Avoid Overdraft Fees From Overspending?
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If you’re like me, this week, you'll probably feel the same thankful I-don’t-need-to-shop-this-much-again-for-another-year sigh of relief. But even when the year-end holidays have passed, you might still be seeing the ghosts of all your purchases on your bank statement, especially if you overspent to the point of overdrafting and are dealing with extra fees.
Leaning on overdraft coverage — where you spend more than you have in your checking account and have to rely on your bank to pay for your transaction — as a remedy for overspending can be costly. Many overdraft fees are $30 or more per occurrence, and you may be hit with that fee multiple times if you keep spending. Here are your options for overdraft protection and some tips on how to avoid overdrafting during the next big spending season.
Common overdraft protection options
Here’s my quick breakdown of the overdraft protection options that banks typically offer:
Overdraft protection transfers. Many banks will let you link your savings account to your checking account and pull in your savings to cover the cost of an overdraft. Be careful, though: Banks sometimes charge a fee for this service.
An overdraft line of credit. Potentially a very costly option, an overdraft line of credit will cover the cost of your overdraft but will likely have an interest rate that is comparable to that of a credit card.
A grace period or buffer amount. Many banks are introducing longer grace periods where you aren’t charged a fee for a day or two after your overdraft so you have time to add money to your account. Some banks are offering buffer amounts, meaning that overdrafts are covered up to a certain amount, like $100, until you’re able to put more money into your account.
Opt out. If you don’t want to deal with the hassle of worrying about overdrafts, you can opt out of all coverage options and your bank will simply decline any transactions that would result in an overdraft. You’ll avoid fees this way, but it can also be awkward if your debit card doesn’t go through when you’re trying to make a purchase.
Banks are taking steps to make it easier for customers to handle overdrafts, but there are also plenty of tactics that can reduce the chance of an overdraft.
Prep for the future to avoid an overdraft
Here are some other tips for avoiding overspending:
Set up low-balance alerts. Most banks allow you to set up low-balance alerts, where your bank will text, email or send a push notification to let you know when your account drops below a certain threshold, like $50. This service can give you a heads-up that you need to be careful with your spending.
Keep an eye on automated payments. Automatic subscriptions and bill pay can be a surprise, making a low balance and an overdraft more likely.
“Keep track of any and all auto payments that regularly occur, and plot them on the calendar to remind you when they should be coming,” said Nia Adams, a personal finance educator at Perspectives, via email. “Many times, funds come out on different days depending on when weekends and holidays fall.”
Shop for a bank with a better overdraft policy. If your bank is particularly harsh with its overdraft fees, now is a great time to shop around, as many banks are reducing or eliminating their overdraft fees.
Budget for the next holiday season. Perhaps holiday spending is a regular tripwire for your budget, and overdrafting becomes a higher risk for you at that time of year. If that’s the case, you might want to reevaluate how you spend on gifts.
“Create a holiday-specific plan,” said Patrina Dixon, founder and CEO of It'$ My Money, via email. “Try to lean towards sentimental gifts as opposed to expensive ones.”
She suggested framing photos from happy memories with your loved one.
“Or,” she added, “make a list for gifts by person, and add an actual gift suggestion and max dollar amount you plan to spend for each. Be sure that total is noted in your budget.”
Consider using a prepaid debit card. If you want to put the guardrails up on your spending, consider getting a prepaid debit card during a spendy season. Since the card isn’t linked to an account, you won’t be able to overdraft, and you’ll be able to use the card like a regular debit card.
Budgeting takes a lot of willpower, and the holidays can be a crucible that tests your spending habits. But with some planning and account setup, you can be better prepared to handle the expenses that come with the season.