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Overdraft Fees: What They Are and How to Avoid Them
Navigating bank account balances can sometimes lead to an overdraft, where the amount of money spent or withdrawn exceeds the available balance.
Read on to understand how overdraft fees work and how to avoid getting these fees.
What is an Overdraft Fee?
An overdraft fee is a charge by a bank when a transaction (like a check, ATM withdrawal, or debit card purchase) exceeds the available balance in your account. The bank covers the transaction but at a cost to you.
How Much is an Overdraft Fee?
The cost of an overdraft fee varies by bank and account type, but typically ranges from $30 to $35 per transaction. Some banks charge a daily fee until the overdraft amount is paid back in full.
How Do Overdraft Fees Work?
When you make a transaction that exceeds your account balance, your bank may either:
- Cover the Transaction: The bank pays the overdraft, allowing the transaction to go through, but charges you an overdraft fee.
- Decline the Transaction: Some banks offer the option to decline overdrafts, in which case the transaction is not processed, and no fee is charged.
Strategies to Avoid Overdraft Fees
Regularly check your account balance and pending transactions. This is key to knowing how much money you actually have available. Most banks offer alert services that notify you when your account balance drops below a set threshold.
You could also link your checking account to a savings account for automatic transfers to cover potential overdrafts. While there may be a transfer fee, it’s generally lower than an overdraft fee.
Check with your bank to see if they offer opt-out of overdraft protection. You can choose to opt-out of overdraft protection, meaning transactions that would cause an overdraft are simply declined.
Effective Money Management to Prevent Overdrafts
- Create a Budget: Know your income and expenses. Stick to a budget that accounts for your financial limits.
- Build a Cushion: Whenever possible, try to keep a small “buffer” in your checking account to protect against overdrafts.
- Review Banking Options: Consider banking with institutions that offer low or no overdraft fees as part of their account services.
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Summary
Understanding your liquid assets and how they fit into your overall financial health helps you make informed decisions about managing money, especially when speed is crucial. They ensure that you are prepared for any financial surprises life throws your way, providing peace of mind and security.