How to Avoid Overdraft Fees

Posted on: 5 June 2017

What are Overdraft Fees?

Many of us are familiar with overdraft fees - also called NSF fees, short for Non-Sufficient Funds fee - that banks charge when our checking account balance goes below zero. Not only do banks charge a flat fee for every transaction, no matter what the size, some of them will charge you over and over for different transactions. Overdraft fees are a big source of income for banks and a big headache for consumers.

How do Overdraft Fees Affect You?

As it turns out, overdraft fees are very expensive - even more expensive than a short-term loan! Why? Suppose you have $1 in your checking account and buy food at a restaurant for $7, which causes your balance to go to -$6. Depending on where you bank, you could be charged up to $40. While you might think that this is a justified fee, realize that the bank is charging you $40 for a $6 loan - a loan that, if you don’t pay it quickly, will have “extended overdraft fees” added to it. Still worse, any further transactions can get the fee applied up to four times per day.

How Can I Prevent Overdraft Fees?

For new borrowers, Fig Loans currently charges about $10 per month for every $100 you need in a short term loan. Although it’s difficult to compare, paying $40 to borrow $6 is defiinitely more expensive than paying $10 to borrow $100. Banks can and will charge you huge fees for small slip-ups so it’s often better to get short-term emergency funding than to incur overdraft fees. This is doubly so when your short-term funds can come from options that are lower cost than a Fig Loan or other financial products like credit cards.

But what about overdraft protection?

In recent years, many banks have started offering overdraft protection programs for people who have both savings and checking accounts at the same bank. These services allow the bank to transfer a balance from your savings account to your checking account in case you accidentally go below a zero balance - for a fee. What many banks don’t tell you is just how steep this fee can be. For example, Wells Fargo charges $12.50 for each transaction where you use overdraft protection. They're charging you for money you already have! While it’s a smaller price to pay than an overdraft fee, don’t be fooled: overdraft protection is still a way for banks to make huge amounts of money off of you.

Our advice? Keep your checking account balance high enough for emergency spending to help you avoid these fees. And if you do run low, know that overdraft fees are to almost always be avoided as they are one of the most expensive short term loans out there.

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