As I mentioned earlier today, overdraft fees (also known as NSF fees, insufficient funds fees, etc.) are basically interest paid for the privilege of using a bank’s money for a short period of time, a loan. There are ways to avoid them without yelling at underpaid customer service representatives who don’t have the authority to help you with the issue.
It’s better to prevent overdraft fees than attempt to have them reversed after they appear on the monthly statement. Several of these preventative tips are covered in Overdrawn!, the documentary I mentioned this morning. This advice is generally straightforward, and many people might find these tips to fall under “common sense.”
Before taking action, keep in mind that forgoing overdraft protection adds more responsibility to you, the customer, if you want your checks to clear and your purchases to complete.
Don’t accept overdraft protection. When you apply for a new account with a bank, if you have an option of overdraft protection, decline. If the option isn’t explicit, talk to a bank representative before opening the account. The option may be hidden to the customer. If there is no option, even after speaking with a representative, consider opening your account with a different bank.
If you’ve already opened the account, call customer service and as for the “feature” to be disabled on your account.
Track your deposits and withdrawals. By declining overdraft protection, you leave yourself vulnerable to rejected transactions and bounced checks. Keep in mind that deposits via check may take several days to increase your available balances, and track your spending using software like Quicken, Personal Capital, GnuCash, or any tracking system works for you (as long as it does work).
Link your checking account to a savings account. Of course, this option is most effective when your savings account carries no maintenance fee and no fee for transfers for overdrafts. Most importantly, the savings account must be funded to cover the overdraft.
Linking a credit card, as offered by many banks, may not be a good idea. This approach encourages taking on more debt. Your overdraft may be considered a cash advance, which on most credit cards carries a higher interest rate than a purchase. If no other options are available, this may be the best way to avoid the accidental NSF fee.
Buffer your balance. Many people manage to keep their checking account as low as possible, either out of necessity as living paycheck-to-paycheck is a reality for many families, or for maximization of interest. To maximize interest income, the prevailing thought is to leave your checking account as low as possible and transfer any unused cash to a high-yield savings account, so more money is working to earn interest.
If your checking account is subject to overdraft fees and if you believe you are prone to making a mistake with your money management, consider trading some potential interest for a safety net in your checking account. Pad your balance by $100, $500, or $1,000 — whatever works for you and your cash flow — to help ensure you won’t accidentally withdraw more than you have. If it helps, don’t record this padding in your Quicken records. This way you may not be tempted to spend your buffer.
Updated April 20, 2017 and originally published October 27, 2008.