Banks have several provisions for their clients that can be a saving grace. If you want to purchase an item or make a payment but don’t have enough money in your account, you don’t have to worry. You can authorize the bank to transfer money into your account. This overdraft amount depends on what you agree with the financial institution.
What Is a Bank Overdraft?
An overdraft is money banks extend to customers when their account balance reaches zero. That means once you have a low bank balance, you can access an extra amount of money to make the payment or even receive cash from an ATM. Typically, the customers get a loan that they pay back plus interest and overdraft fees.
The bank overdraft enables you to keep transacting even with a negative account balance, but there’s a limit to the amount you can access. More so, you have to pay back the money after the agreed duration.
This overdraft can get you out of a sticky situation when your bank balance is low. In addition, it charges a lower interest rate than other solutions like credit cards, so many people opt for it.
Just be sure to talk with your banker before you choose to get an overdraft. Requirements and options vary across different banks, such as the money you receive, payment duration, overdraft policies, and overdraft fees. As a result, you might need to shop around and switch to a bank with a favorable option.
What Is an Overdraft Fee?
An overdraft fee is an amount a financial institution charges when a withdrawal or payment from your account goes beyond the balance available, and your financial institution covers the transaction as an overdraft protection service.
Let’s say you go to the store to purchase an electronic device or any other equipment using your debit card, but there aren’t sufficient funds in your savings account or checking account to cover it. Rather than leave empty-handed, you can authorize an overdraft from your bank to pay for the remaining sum. However, the bank will charge you a fee for the overdraft.
How Do Overdraft Fees Work?
When you have a good relationship with your bank, you don’t have to help you avoid embarrassing situations due to money shortages. Instead, you receive instant cash to cover the remaining bill under overdraft protection but at a fee.
The fee is the amount of money you pay the bank for having insufficient funds in your account when paying for specific items or making a service payment. You have to repay the extra amount the bank covers for you, the interest it attracts, plus the fees.
Often, most checking accounts have the overdraft protection feature for their clients. But you have to talk to your financial institution to get more details about it. There is general information that each bank shares, including:
Transactions That Can Receive an Overdraft
Even before dealing with overdraft fees, it’s crucial to know the types of transactions that the overdraft covers. Most banks focus on electronics and checks with fewer funds in the account. However, you can find others that permit ATM withdrawal of the overdraft amount.
Financial institutions vary when it comes to the overdraft fee amount. Most charge an average of $35 and allow you to transact numerous times in a day. But overdraft fees and rules vary from one financial institution to the next.
Find out more information about the overdraft limit your bank permits.
How does the bank expect you to pay the overdraft? Is the timeline appealing? Understanding overdraft terms can help you make wise choices. Despite banks charging overdraft fees, you can avoid paying it altogether. All you need is the correct information.
How to Avoid Overdraft Fees
Though financial institutions charge overdraft fees, you can avoid paying the amount. But how? Below are a few ways you can maneuver past this and still enjoy using an overdraft.
Refuse Automatic Overdrafts
You don’t have to use an overdraft, which saves you from paying hefty overdraft fees. The first day you fill in the information for a new current account, opt-out of overdraft. Although this opens you up to instances where you might not have enough money to pay for a good or service, it limits you from unnecessary spending, costs, and fees.
Have Extra Money in Your Account
A current account receives an overdraft when you don’t have enough money in it to pay for a good or service. After payday, avoid taking out all the money from the account. Instead, leave some funds to meet your needs or to cover costs you forgot about.
Once you do this and maintain a reasonable budget, you won’t need to pay any overdraft fees. Not only does this help reduce debt, but it also saves you from unnecessary spending. Thus, you can save and get items you want at a future date.
Always Know Your Balance
Do you keep track of the amount of money in your account? Not knowing your bank balance leaves you vulnerable, and you might end up using an overdraft.
Remember to keep an eye on your bank balance so you can make purchases or payments only when you have enough money to do so. Besides, it’s a better way to track your budget and help you live within your means.
Link Your Accounts
Having several accounts can be a way to evade overdraft coverage and fees. Make sure the accounts have money in them, and you can access it when in need. For instance, you can link your credit card to cover the current account when you have a low balance.
The best way to find out more about this is to talk with your banker. Some even permit you to link a savings account but make sure you know if this will incur a transfer or other fees. Usually, most banks charge a lower transfer fee which is better than the hefty overdraft fee.
Before you sign any document that the bank hands you, educate yourself about what it says. Learn as much as you can about overdrafts and the policies around them. At times, you can receive an overdraft notification and evade paying a fee because you’re aware of the bank rules and regulations. In addition, information gives you the power to act fast to protect yourself.
Authorize Low Balance Alerts
At times you might incur an overdraft because you did not know you had a low balance. While you can monitor the money in the bank account, there’s another way to avoid overdraft fees.
Authorize the bank to notify you via email or SMS alerts when you have a low bank balance. That makes it easier to avoid making any payments from that point until you add more money into the account.
Line of Credit
Instead of paying overdraft fees, you can talk with your banker to give you a line of credit. Negotiate the limit to be equal to that of the overdraft and make sure you meet the terms and conditions. Often banks will be open to this, especially if you have a good financial history with the institution. You pay back the amount plus interest charged, but there are no extra fees incurred.