If you work for a bank, here’s some good news: An economic research firm, Moebs Services Inc., recently released a survey of 3,817 financial institutions, and found that overdraft fees on checking accounts brought in $33.3 billion in revenue in 2016, the largest amount in seven years.
But good news for your bank can be bad news for you.
A bank or credit union charges a customer overdraft fees when there isn’t enough money in their account to cover an expense. So if you spend $30 with your debit card, but you only have $10 in your bank account, you may be able to walk out of a store with $30 in merchandise, but your bank account is now $20 in the negative. And you’ll owe your bank even more once you’re charged an overdraft fee the next day.
A typical overdraft fee is around $35. That can become very expensive if a consumer collects a few overdraft fees overnight — and especially if they start picking up fees on a regular basis.
All of which means you have a lot of incentive to avoid overdraft fees. Your bank may seem greedy, but you’re probably doing something wrong, too. But what? If you can figure that out, you can probably stop the overdraft madness.
[See: 10 Money Leaks to Shut Down Now.]
Perhaps you aren’t paying enough attention to your bank accounts. This is the most obvious explanation, and one you should really consider thinking about. Maybe you look at your bank balance on a daily basis, but if you’re spending a lot and using your debit card, your smartphone and taking out ATM withdrawals to pay bills and make purchases, perhaps you should try looking at your bank account two or three times a day.
Joe Mecca, a spokesman for Coastal Federal Credit Union in Raleigh, North Carolina, says there seem to be two types of customers who get overdraft fees.
“There are people who simply don’t pay attention to how much they have in their account or what’s scheduled to come out of it. To them, an overdraft is a surprise,” he says.
But Mecca adds that the second group of consumers “are people who intentionally use overdrafts, despite the fees. They use it as a form of short-term credit, albeit an expensive one.”
Forget about the second group for now, though we will come back to them. If you’re in the first group, you clearly need to pay more attention to your account, or devise some life hacks to remind you about the dangers of overdrafting. Mecca suggests the following:
— “Set up alerts to warn you when you have a low balance and should stop spending.”
— “Check your accounts regularly and keep track of all transactions.”
— “Maintain separate accounts for paying bills and spending.”
— “Download your [financial] institution’s app so you can quickly check your balance before making a purchase.”
— “Establish overdraft protection in the form of automatic transfers from other accounts.”
On that last point, it should be noted some banks charge fees for moving money from one account to another. Still, Mecca’s point in bringing it up is a good one. If you have an overdraft problem, talk to your bank. The bank shareholders may enjoy those overdraft fees, but your bank manager or teller will probably be more than happy to offer suggestions that help you put a stop to those charges.
[See: 8 Easy Ways to Organize Your Financial Life.]
Maybe you don’t have a dollar number in mind that makes you curb your spending. Maybe you feel as if it’s perfectly acceptable to reach zero dollars in your bank account (after all, it’s your money), and so you continually spend as much as you have — and then sometimes run into trouble when you forget about a rogue check you wrote or about an automatic withdrawal scheduled to come out.
John Lynch, a New York City-based marketing director with ExpressBusinessLoans.com, says that small business owners need to be mindful of overdraft fees as much as consumers.
“The fees are often higher for small businesses,” he says.
Lynch advises business owners who struggle with cash flow to keep an average daily balance of one-fifth of their total monthly revenue. But that’s not a bad plan for consumers either, or some variation of his idea. If you make $5,000 a month, and you’re hammered with monthly bills, you may feel there’s no way you can constantly keep $1,000 in your bank account — but what about $500? Or at least $300?
If you continually keep some sort of substantial cushion in your bank account, you should (at least in theory) be able to avoid going into overdraft, even if you have forgotten your cable bill will be automatically withdrawn tonight.
[See: 9 Financial Tools You Should Be Using.]
Could it be that you no longer mind overdraft fees? As Mecca said, some consumers pay bills knowing they’ll go into overdraft, and use it as a form of expensive credit.
It’s understandable that if you’re choosing between owing money to the electric company or your bank, you’ll choose your bank and pay that utility bill — and then later, play catch up with your bank account. But, still, if overdraft fees have become part of your routine, you’re more likely to not do anything to stop them.
It might be helpful to know some of the characteristics of a typical consumer who has had an overdraft fee in the last month. Fifth Third Bank, a regional bank headquartered in Cincinnati, recently commissioned a survey of 3,380 adults — and out of the 7 percent of them who had at least one overdraft fee in the last month, the consumers all shared several characteristics, including the following:
— Only 45 percent of the 7 percent of consumers who had an overdraft have overdraft protection
— Two-thirds (68 percent) of that 7 percent live paycheck to paycheck
— Fifty percent have chosen to pay a bill late to pay for something essential they needed (i.e. groceries, car maintenance, etc.)
— Sixty-nine percent feel not making enough money to save for emergencies stands in the way of their financial security
Clearly, there’s a trend here — consumers who pay overdraft fees tend to have serious money problems.
And it can be very challenging to avoid being socked with overdraft fees when you have constant money problems. But that’s why it’s important to not become resigned to this expensive fate. Maybe you have constant money problems because you’re constantly paying for overdraft fees. Understanding the problem can be the first step to finding a solution.
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Racking Up Bank Overdraft Fees? 3 Mistakes You’re Making originally appeared on usnews.com
