How to break free from overdraft fees

Ask the Experts: Getting out from under overdraft fees

I am wondering how I can repair my bank account from being so far negative every time I get paid. When my check is deposited I have used so much overdraft protection that the fees, plus my expenses, have eaten over half of my paycheck and I am always back to square one. How can I get a hold of this and get out of the red and back in the green without continuing to fall behind on bills? –Uraina

Overdraft protection is a slippery slope – one that a lot of consumers find themselves falling down on a consistent basis.

American banks and credit unions earned over $32 billion from overdraft fees in 2012. This is despite the fact that one of the provisions of the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 was to mandate that financial institutions could no longer automatically enroll consumers in overdraft protection.

In fact, consumers are more than a little culpable in the continued popularity of overdraft fees: more than 25 percent of consumer overdrafts are intentional – meaning those consumers know in advance that their account doesn’t have sufficient funds, but make the purchase anyway, understanding that a hefty fee will be added.

Not that financial institutions do much to help: many banks have been accused of processing daily transactions out of order (processing the largest transactions first, regardless of when they occurred) in order to maximize the number of overdraft fees they can charge.

Beating the cycle

Overdraft protection is marketed as a benefit to consumers, and – used sparingly – it can be just that. The trouble really begins when consumers begin using their overdraft protection as a loan to cover expenses beyond what their accounts can handle.

Because your account keeps working, the expenses keep piling up and your income isn’t getting any bigger, it’s easy to just keeping buying what you need and letting your bank account get deeper and deeper into the red. Pulling out of the cycle isn’t easy, but it can be done. You just need a good plan and a lot of self-control.

Consider these six steps to help put you back in the black.

Overhaul your budget

Your budget is broken (if it ever existed in the first place). Overdrafting your account once is usually a sign that you’ve simply lost track of your finances. Overdrafting repeatedly means you’re spending money you don’t have.

You need to make cuts. Quickly. Look at all your non-essentials. Until things stabilize you’re going to have to go without a few things. Cut the cable. Put a freeze on eating out. Evaluate your monthly memberships and see if any can be put on hold or stopped outright.

Ask for a courtesy waiver

If you have multiple overdraft/over-limit fees, ask your financial institution to waive a few of them as a courtesy. They may very likely say no, but it never hurts to ask.

Sign up for balance alerts

Many banks and credit unions offer free balance alerts via text or email. If you’re not so great at keeping track of your account balance on your own, regular automated updates could help to keep you from overspending.

Opt out of overdraft protection

It’s nice to not go through the ordeal of having your card rejected or your check bounce, but that convenience isn’t worth the fallout to your finances once you start overdrafting on a regular basis. Overdraft protection isn’t a requirement and all financial institutions should allow you to opt out if you choose to do so.

Connect your overdraft to a credit card or savings account instead

If you absolutely must have overdraft protection, you may be better served by connecting that protection to a credit card or your savings account instead. Many financial institutions offer both alternatives. If you do open a credit card to serve as your overdraft account, remember that even though you aren’t being charged a fee, you are being charged interest. Your habits still need to change – relying on an overdraft credit account every month just exchanges one problem for another.

Consider borrowing money to pull yourself out of the red

It’s incredibly difficult to stabilize your finances when half of every incoming paycheck goes to banking fees and old purchases. It’s not easy to ask for help, but consider asking family or friends for a small, short-term loan to help you get back to zero and stop the flood of fees.

Getting out from under your overdrafted account takes hard work and a lot of commitment, but it can be done. If you need help creating a realistic budget and getting your finances under control, consider speaking to a certified credit counselor today.

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

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