Overdraft Fees and How They Stack Up
Just what is an overdraft fee anyway? These are fees charged you by your bank because you have written a check for more money than you have in your account and the bank has lent you the money to cover the excess amount. For instance, if you wrote a check for $20 more than your bank balance, that $20 is in overdraft. The bank lends you the money to cover that $20 but it also charges you a fee (say, $36) for doing so. This is called an “overdraft fee”. It keeps your check from “bouncing” and, thus, protects your credit rating. If you have written more than just the one check, you will incur an overdraft fee for each check written that was over your bank balance. Some banks offer “overdraft protection”. This is a line of credit (for instance, $1000.00) that protects your account against overdrafts. You borrow this money at a % rate of return or a flat fee when you write a check that is more than you have in your account. The amount you pay depends on your agreement with the bank when you took out the insurance credit amount.
You can go into overdraft by writing checks for more than your balance or for using your debit card (which deducts cash immediately from your account) and then having a check pay that is more than the balance left. To understand this, you need to know that banks don’t always deduct your checks by date or order that they are written. They are often deducted by amount with the higher amount being deducted from the account balance first. Sometimes you are able to cover the overdraft amount during the same posting period and avoid any fees. This will only happen if you have an excellent relationship with your bank and your bank calls you to alert you to the problem. You should always review the bank’s overdraft policy prior to opening an account. NSF and overdraft fees show up on your credit report.
There is a set fee for an overdraft ($36)(each bank differs). This is charged on each check that is returned (or should be returned) when the account has no money or less than needed. If you don’t pay your overdraft and fee within 5 business days there is an additional $10 fee charged to your account (now you owe $46 in addition to the amount of each check). If you have not paid that amount within five more days, you will be charged an additional $10. This will make the total owed $56 in addition to the check amount. This is the policy of one Delaware bank. There are additional fees for additional circumstances but it is easy to see how the amount of these fees can begin to stack up, especially if you have multiple overdrafts.
You should know how much money is in your bank account at all times. Don’t guess. If you go out on the town and use your debit card to buy Broadway tickets and to pay for dinner after the show, a taxi to the train station and for the train ticket home, you may spend $400.00. If you take this amount out of your bank account by debit card when it says on the screen that the balance is $550.00, and a $300.00 check pays the next day or right after that transaction, you will be overdrawn and the overdraft fee will be charged. Each successive check will be charged in overdraft because your account is in a negative balance. You can accrue as many fees as you have checks to pay prior to making a deposit and paying the overdraft fees.
You need to balance your checkbook every day so that you can avoid overdraft and overdraft fees. You can help prevent accruing overdraft fees by keeping a “phantom” balance ($50-$100) in your account that you do not include in your checkbook balance. Credit Unions have lower fees so put your checking account there.