Developing some basic skills with personal finance goes a long way, but if you’re unsure where to start, we have you covered. When you have an understanding of how the system works, you are much more likely to be able to make your money work for you.
If you’re new to the world of banking and if you want to dive into the perfect guide to help you understand money management and smart banking tactics, then this guide was written for you.
Read this guide to discover the following:
- A simple introduction to smart money management.
- All about overdraft coverage and how overdraft fees work.
- How to avoid overdraft fees, even if you’re short on cash.
- The real reason banks offer overdraft coverage.
- When payday loans are a smarter option than overdraft fees.
- The only good news about overdraft fees.
An Easy Introduction into Money Management
If you want to open a checking account or savings account at your favorite bank, then the number one skill you need to learn is how to manage your money. Money management means you should keep a close eye on your incoming and outgoing payments so you can ensure that you can afford to make any payments when they are due.
Always try to know when your bills are due, so you can verify that your account has enough cash to cover the cost. Another essential strategy is to stash away an emergency fund. Having an emergency fund is rarer than ever since according to Bankrate, roughly 60% of Americans cannot afford even a $500-$1,000 surprise bill.
If you are ever short on cash, and if you still need to make a purchase, your bank may offer a feature called overdraft coverage. That way, if you are a few dollars short when a bill is due or when you make a purchase, your bank can cover the difference. This now leads us to the important topic of overdraft fees.
What Are Overdraft Fees and How Can You Avoid Them?
An overdraft is a high-interest loan that your bank gives you to cover the cost of purchase even if your bank balance is zero, or nearly zero. For example, If you have $5 in your bank account, and you try to purchase a Cheeseburger for $7.00, your bank will gladly loan you the $2.00 so you can continue to make the purchase.
The bad news is that the $2.00 the bank gives you isn’t free. If you’re short on funds and trigger an overdraft, your bank will charge you what’s called an overdraft fee.
An overdraft fee is usually around $30 to $35. You can see how, in this case, the bank loaned you $2.00, so you could purchase your cheeseburger. However, let’s pretend that your bank also charged you a $35 overdraft fee! In this case, your bank charged you roughly 1750% (one thousand, seven hundred and fifty percent) to cover your cheeseburger. (1750% of $2.00 is roughly $35).
Another downside of an overdraft fee is that you can continually draw them repeatedly. What happens if the next day you’re short a few dollars when you’re paying for your electric bill? Then a few days later you’re short by a few dollars when buying gas. You can see how overdraft fees can stack up very quickly unless you always have a close eye on your bottom line, especially if each overdraft fee is $35 each.
If you don’t have the most significant budget or income, then you can also see how burdening it is to stack up many overdraft fees. Imagine if you got hit with half-a-dozen overdraft fees when your bills are due for the month.
The number one way to avoid the overwhelming debt of overdraft fees is to ensure that your money is in your account when you buy something or when a payment is due.
Careful budgeting can help you ensure that you have the funds to cover your purchases. If you’re short on money, then having an emergency fund can come in handy big time. You can quickly transfer that cash into your bank so you can avoid any overdraft fees in a pinch.
The Real Reason Banks Offer Overdraft Coverage
There are a few different reasons why banks offer overdraft coverage. The first reason is that overdraft coverage can prove helpful for you in some cases. The other purpose is that a bank can profit by offering overdraft coverage and charging you overdraft fees.
Let’s look at what happens if you didn’t have any overdraft coverage at all. Let’s pretend that your electric bill is due today, but your bank account is a few dollars short. In this case, if there were no such thing as overdraft coverage, the payment would fail since you don’t have adequate funds to pay the bill.
If your electric bill payment doesn’t go through, you could experience service interrupts, late fees, or both. So, while the overdraft fees can undoubtedly sting, they can prove helpful if you are short on cash and can quickly repay your bank.
Also remember, that for this overdraft coverage service, the bank charges you a fee of roughly $30 – $35. It’s important to know that the banks may profit when they collect overdraft fees from customers.
According to a report by MarketWatch, banking customers paid $34.3 billion in overdraft fees during 2017 alone. That’s thirty-four point three billion dollars in overdraft fees, just in one year! The same report states this $34.3 billion represents a 3% increase in fees from 2016 to 2017. [Source].
Another report by the Consumer Financial Protection Bureau analyzed the consumer overdraft fees of 628 banks. The report found that roughly 8% of net income from the banks came from overdraft and non-sufficient funds (NSF) fees. This 8% figure represents the mean (aggregate) of net income across all 628 banks. (Source listed below).
Why A Payday Loan Might Be A Better Option Than Dealing with Overdraft Fees
It’s a proven statistic that banks make billions of dollars from overdraft fees. If you get caught in a dizzying cycle of hitting your overdraft limit, the costs can add up quickly, especially if you run several overdraft fees in a row.
A better option may be a payday loan. A payday loan is when a payday lender agrees to give you a short-term, high-interest loan. You might want to consider a payday loan, if you understand the terms and if you can pay the loan off quickly.
You might question if a payday loan is a wise strategy to deploy when grappling with overdraft fees. It’s always critical to take a close look at the terms of the payday loan and make sure that you can pay off the loan as quickly as possible to avoid late fees.
If you need fast cash for an unexpected bill, and if you know for a fact that you can pay off your payday loan on time, then a payday loan might save you money when compared to compiling overdraft fees. Every financial situation is unique, so pay close attention to the specific terms of the payday loan to ensure that it makes sense for you.
Whatever you do, never take any loan if you can’t afford to repay it on time! Taking a loan that you cannot pay back timely will haunt you, and it can even damage your credit score. If your credit score takes a hit, it becomes even more challenging to get a good deal on loans. On the other hand, if you work to improve your credit score, a whole avenue of better loan options may open up to you.
Payday loans might be a smart alternative to overdraft fees if the following is true:
- If you run the risk of triggering multiple overdraft fees consecutively.
- If you understand the payment terms of your payday loan.
- If you know that you can pay back your payday loan quickly.
How to Easily Avoid Overdraft Fees Even If You’re Short on Cash
The smartest way to avoid overdraft fees is to keep an eye on your bank balance. Even if you’re underbanked and don’t use your bank account frequently, you could, at the very least, check your bank account balance weekly to ensure that you have enough money to cover bills.
Did you know that you can even opt-out of your overdraft coverage plan with your bank? You can also avoid opting-in if you haven’t done so already. However, always remember that if you don’t have overdraft coverage, then transactions will fail if you don’t have enough money in your bank to cover the cost.
Another smart option is to link your checking account to your savings account. That way, if your checking account is short when you try to make a purchase, the bank can still access money from your savings account. The bank will still charge a fee for this service. However, it’s likely to be much less than an overdraft charge.
The Only Good News About Overdraft and Non-Sufficient Funds (NSF) Fees
We know how frustrating it can be when you’re low on cash and an overdraft charge can make financial matters worse.
The good news is that an overdraft fee will not hurt your credit report if you pay the fee and pay the bank any money that you owe as a result of the overdraft.
If you’re unable to make the payment, then your bank might close your account, and they could even turn your account balance over to collections. From that point, the delinquent account may show up on your credit report.
Smart money management takes practice.Remember what you learned in this guide and keep your eyes on your balance. Always try to check your bank regularly to ensure that you can cover your upcoming bills.