No customer wants to dip into their overdraft, but in some cases they have no choice. It is seen as an additional line of credit that doesn’t require a new credit card or loan, but it’s far from perfect.
The average cost of an overdraft is $35 a month, and in most cases you need to pay for the pleasure of having one even if you don’t use it. What’s more, you will pay those fees even if you are only a few dollars overdrawn.
Official statistics suggest that banks earn over $10 billion a year from overdraft fees, a simply staggering figure and one that needs to be reduced. So, if you’re struggling with your overdraft, take a look at these tips to pay it off and avoid getting into trouble in the first place.
1. Budget, Budget, Budget
The vast majority of people go into their overdraft without realizing it, and that means they could be accruing fees and interest without knowing it.
If you’re in debt, it’s easy to turn a blind eye to your bank account, avoiding that sinking feeling that you get every time you check and discover more bad news. But the problem isn’t going to go away if you ignore it—it’s only going to get worse.
Make sure you have access to your bank account online, make sure you check every single day, and also keep an account of every bill, every check and every cent that you spend. If you know what you have to spend and what you can’t afford to lose, and you monitor it every step of the way, then you can avoid the descent into your overdraft.
Is an Overdraft a Good Idea?
It all depends on the situation and the way the overdraft will be used. If you are using it as an additional line of credit, dipping into it at every opportunity and spending thousands, then no, it’s not.
A credit card or a personal loan will make more sense in situations such as this and if your rating is too low and you already have too much debt, you should consider a consolidation loan instead.
If you’re using it to scrape a few dollars together in order to avoid missing bills, taking out payday loans or doing something else drastic, then it is definitely worth it.
So, weigh up the pros and cons before you take it out.
2. Watch The Fees
Bank fees can send you into your overdraft. The less money you have, the more impact these fees will have and the closer to your overdraft you will get. It’s one of the reasons why so many debtors find themselves deep in their overdraft.
If you regularly take cash out of an ATM then check how much you’re paying for the pleasure. You could be paying up to $2 a time and while that may not seem like much on the surface, it adds up over the course of a month. The same applies to credit card fees, foreign transactions, balance transfers, interest, and more.
There are so many ways that your bank can and will take money from you and as the customer the onus is on you to limit these occasions. And if you can’t, then it’s time to look for a new bank or to change your ways. Instead of using ATMs, make the switch to virtual payments like PayPal and credit cards; instead of checks and transfers, use Venmo.
Can I Withdraw Money if my Account is Overdrawn?
Yes you can. The money you have in your overdraft will function the same as any other money. You can spend it, transfer it, and withdraw it via an ATM. Just make sure you understand the ramifications before you do as it could cost you in the long run.
3. Use Automatic Payments
You shouldn’t need to write checks every month and you definitely shouldn’t need to withdraw cash or leave your home to pay bills. This is the 21st century—everything can and should be instant and easy.
If you don’t already have them, set up instant payments for all of your bills and utilities. You can manipulate the dates so that the payments go out when you know you can afford to pay them, such as just after you have been paid.
If you have an issue with frivolous spending this can actually be a good deterrent. If all of your bills are paid as soon as money hits your account, then you won’t have a wad of virtual cash tempting you to spend big.
4. Don’t Take Overdraft Protection
The overdraft protection schemes that banks offer you when you first signup are as useful as the extended warranties that electronic stores try to sell you. And they serve the same purpose, which is to make the company extra money while providing the customer with very little benefit.
These schemes will only increase your fees, with some banks charging up to $5 a day—even on the smallest sums—to customers who dip into their overdraft.
5. Save Money
If you have expendable income at the end of the month, don’t rush to spend it. Use the money to pay off as much off your debts as possible, therefore reducing the interest, and if you have any left after that then put it to one side.
If you get into trouble in the future, then instead of tapping into your overdraft you can simply withdraw money from your stash. It should still be treated as an untouchable, rainy-day fund, as opposed to something you tap into whenever you feel like it, but it means you have a fee-free cash option when you’re short on cash.
6. Get Alerts
Finally, signup to alerts from your bank to receive messages as soon as you drop below a certain amount. This is necessary whether you regularly check your bank or not, as a rogue payment, a forgotten subscription payment or even a fraudulent transaction can send your account balance plummeting in a matter of seconds.
These alerts can be sent to your phone or email address and you should be able to choose when you receive them. If so, set the alert to send when you near your overdraft, as opposed to when you enter it. That way you actually have time to do something about it.