The following is a guest post from fellow millennial blogger, Erin, at Magnify Money.
It’s close to payday and funds are running a little low in your account. You do the math and figure you can hold on just another day until you receive a financial injection into your checking account.
You head out to grocery shop for the week without realizing that it’s also the day your automated electricity payment is set to take money from your account. You swipe your debit card for your groceries and suddenly you’ve gone overdraft.
You also could’ve just been smacked with a rather expensive fine.
Depending on your bank you could be on the hook for a fee upwards of $35.
For example, Bank of America charges $35 for each overdraft transaction with up to four in a day. That means BofA could be charging you $140 of overdraft charges in a single day.
If you leave your account in the red for five consecutive days, you’ll get an additional $35 charge on the sixth day.
You even get charged a $35 fee if the bank rejects your initial overdraft transaction charge due to non-sufficient funds in your account (also called an NSF fee).
But smacking you with one overdraft fee may not be enough for your bank. Some banks participate in something called “high to low processing”. Simply put, they restructure your transactions from the day so the highest amount was charged first, causing you to pay more in fees.
How does that work?
You start with $70 in your bank account and charge $4.50 for your morning latte, then $40 on gas to fill up your tank, and your gym automates your $35 membership fee.
If those posted in order, you only went overdraft on the last charge. But the bank can restructure your charges at the end of the day so the $40 charge is first, followed by the $35 fee, which puts you in overdraft and then the $4.50 charge is a second overdraft fee. You just lost $70 to your bank instead of $35.
Sadly, that’s legal.
According to MagnifyMoney, a financial products comparison site, the US banks generated over $32 billion in overdraft fees in 2013 alone.
Good first step. But banks only allow you to opt out of overdraft fees related to ATM and debit transactions.
Electronic transactions (like automated payments to your gym or cable company) or cashed checks can still send you into overdraft and result in a fee.
Some people try to get proactive about protecting themselves and opt-in for overdraft protection. You can link your checking account to a savings account, credit card or bank line of credit. It sounds like a simple fix, but still ends up costing you.
Even though Bank of America could simply be moving your money from savings to checking – which costs them next to nothing – you’ll get charged $10. Sure, that’s $25 less than going overdraft but its still a heinous charge for something that costs the bank less than a penny.
If you link your credit card for overdraft protection, be prepared for the money to get treated like a cash advance with a very high APR.
Bank of America recommends simply being more diligent by always having a $500 buffer in your checking account, constantly checking your account balance and setting up alerts. Okay – those last two ideas are fair.
We all know people don’t want to keep logging into their bank app to check their balances while they’re out shopping or running errands (and even today not everyone has a smartphone). Fortunately, there is another way to minimize — or erase — overdraft damages.
Switching to internet-only banking like Ally, Charles Schwab or Discover can help people stop hemorrhaging money to the banks’ fine print.
Fees for Internet-only banks are substantially lower than traditional brick-and-mortar banks. Ally only charges $9 per overdraft or NSF with a maximum of $9 a day. If you opt-in to overdraft protection by linking your savings to checking, you won’t get charged a fee. Not even to transfer your money from savings to checking.
Plus, these Internet-only banks offer far higher interest rates for savings accounts than brick-and-mortar banks.
MagnifyMoney offers a table to find the best checking account offers for you. You can try it out here.
If you tend to go overdraft because you’re short on cash, then consider opting for a line of credit instead of incurring more overdraft fees.
Credit unions, personal loans and even some banks can offer a line of credit at an interest rate that would be cheaper than you racking up overdraft fees. You can dig out of the negative balance on your bank account and have a buffer to prevent immediately dipping back into overdrafts.
Don’t let traditional banks take advantage of forgetfulness or a lack of funds in your account anymore. Internet-only banks often offer real overdraft protection instead of the Mafioso type protection brick-and-mortar banks often have available.
No one should be paying $10 to move money from his or her savings account to checking.
Have you ever been slapped with overdraft fees? What do you do to avoid them?