When you open a checking account, you put a certain amount of money on deposit at your bank. If you make a withdrawal on your bank account when there is no money in your account, or write a check against an account which has insufficient funds, the bank may charge you a fee, called an “overdraft fee.” These fees are also sometimes called a “bounced check” or “insufficient funds” fee, but the basic meaning is the same: you are overdrawn on your account and you are being penalized for it.
How Overdraft Fees Occur
Let’s say, as in the example above, that you have written a check for $35, and when the check is presented to the bank, you only have $20 in the account. The bank has two choices in this instance, either pay out the check and charge you a fee, or don’t pay out the check, and charge you a fee.
Depending on how benevolent the policies of your bank, savings and loan or credit union is in this instance, they may pay out the check and keep it from bouncing. However, if they choose not to pay out the check, you may be charged not only the overdraft fee, but a returned check fee from the person who you wrote the check to as well.
What Will Prevent Overdraft Fees
There are ways to avoid overdraft fees, and many banks offer what’s called “overdraft protection” in the event that you find yourself short of funds in your account on a given month. To avoid overdraft fees, see if your bank will let you do one of the following:
You can link your checking account to a savings account, if you have a savings account with the same bank. If you overdraw yon our checking account, the bank automatically transfers money from your savings account to cover the shortfall.
You might be able to set up an overdraft line of credit. To do this, you would need to apply for a line of credit, the same way you would apply for a loan. If you qualify, the bank will extend a line of credit to you as overdraft protection, which you would pay back when you have funds in your account again.
You might also link your account to a credit card, if you have one with the bank. If you choose to link your account to a credit card be careful, because any overdraft amount will be charged as a cash advance and subject to whatever interest rate your credit card charges.
What are your tips for avoiding fees?