How To Stop The Costly Cycle Of Outrageous Overdraft Fees

Photo: Getty Images.
There's a great scene in the 2012 film Frances Ha, in which the title character goes to an ATM and has an all-too-familiar interaction with the money dispensing god.
Frances, who is still sorting out every part of her life, offers to pick up the dinner tab with a guy she asked out to dinner. Her card is declined, so she sprints around the area looking for an ATM, before finally finding one — but it comes with a $3 transaction fee.
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Even though her date is waiting and wondering where she is, Frances pauses for a beat before confirming her withdrawal. She needed the money (about 20 minutes ago), but it's a steep fee to swallow.
Pop-culture moments like that stand out because they feel like rare glimpses into small, relatable things that are often linked to deep feelings of embarrassment. Among those less-explored topics is living paycheck to paycheck, as one-third of Americans across age groups do, according to a 2016 survey from TD Bank. ATM fees are a beast, and can eat up your paycheck before you realize it — as can overdraft fees. In the darker version of Frances Ha, the wayward heroine of the movie might have had her transaction at the restaurant go through, only to pay through the nose for it later because of overdraft fees.
Overdraft fees suck for consumers, but they're a tremendous source of revenue for banks, which made $33.3 billion from them last year. In fact, the Wall Street Journal recently reported that "overdraft-related fee revenue at the 10 largest U.S. retail banks by assets that report this data" — (because, surprise, not all banks or credit unions must do so) — "added up to about $7.5 billion in 2016."
Here's how to stop giving your money away in overdraft fees to banks:

How Do Overdraft Fees Work?

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Overdraft fees can occur when customers make purchases that exceed the amount of money in their bank or credit union accounts. Customers not only pay for the overdraft fee itself, but can also end up paying for maintaining a zero balance in their account for a certain amount of time. With overdraft fees at the largest U.S. banks averaging $30, overdraft fees can quickly and easily add up. In the past, cardholders received overdraft "protection" by default, until 2010 when federal regulations mandated that financial companies give consumers the choice to opt-in before implementing an overdraft charge.

How Can I Avoid Them?

The tricky thing about overdraft fees is that many people who pay them probably don't do so intentionally. Most likely, it occurred by accident. They had $700 left in their account and swiped throughout the week — then the rent check finally went through, or they bought a bottle of water.
Seriously — even small charges can have an outsize impact. In 2014, the Consumer Financial Protection Bureau (CFPB) found that the median transaction amount that led to an overdraft fee on debit cards was $24 or less, and was repaid within three days. "Put in lending terms," they wrote, "if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000% annual percentage rate (APR)." Some of this is avoidable by making a few changes.
Link Accounts
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The FDIC suggests that consumers link their checking and savings accounts to cover the difference of transactions they are short on. However, the Corporation acknowledges that people who don't have a ton of money in their checking accounts probably don't have a bigger haul sitting in savings — so that might not be an option for everyone.
You might also try to use cash more. This won't be an automatic fix (remember those ATM fees?), but it could lead to some relief. The CFPB recently found that frequent overdrafters use debit cards six times more per month than the typical non-overdrafter. They also found that the typical overdrafter who opts in has 22 overdraft occurrences per year and "pays almost $450 more in overdraft fees than someone who has not [opted in]." If you can't go cold turkey, you can at least slow things down.
Don't Automate
Automating certain financial habits, like saving, can be amazing if you're forgetful, or simply hate actively seeing your money disperse. The catch is that ceasing to keep a close eye on what happens with your funds can lead to a lack of awareness over time. So, when it comes to overdrafting, you might not want to auto-pay recurring bills or expenses. This can be a big deal since it is still possible to overdraft even if you're opted out.
As Justin Pritchard explains at The Balance, "when you sign up for automatic electronic payments, your bank might process those payments even if you don't have enough money available. For example, you might have a monthly membership fee billed to your debit card, or you might pay insurance premiums every month directly from your checking account (via ACH)."
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Rather than auto-debiting, enter the dates you want to pay your bills into your calendar — those can be recurring or done each month. Then, pay your bills on those days, calculating how much money you'll have after each bill is paid based on your paycheck cycle. That might mean paying half your bills during the first half of the month, and half later — but ideally it means not paying an overdraft fee while still paying your bills on time.
Ask For Transparency
Additionally, you might call your bank and ask for the truth, straight on. The CFPB is pushing to increase transparency about overdraft fees for consumers, which includes sharing their "Know Before You Owe" overdraft disclosure prototypes.
"Our study shows that financially vulnerable consumers who opt in to overdraft risk incurring a rash of fees when using their debit card or an ATM," said CFPB Director Richard Cordray in a press release. "Our new Know Before You Owe overdraft disclosure prototypes are designed to help consumers better understand the consequences of the opt-in decision."
Stop Being Surprised
Overall, though, the absolute best habit for frequent overdrafters to start if they haven't yet, is to keep the closest eye possible on their bank accounts. Setting alerts can be helpful, for example, creating an alert that sends you an email when a check over a certain amount has processed, or when you have a low balance. However, I can say from experience that those alerts don't always come in real-time, regardless of whether I needed to know urgently or not.
Instead, download your bank's app, make it a common practice to go to their website and log into your account, or go to an ATM and only do a balance check to see where you're at several times a month — if not each week. That won't change how much money is coming into your account, but it will make you much more aware of what is going out.
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