Bank fees typically are incurred where an individual’s account balance exceeds their authorised overdraft limit. In such cases, charges can be quite punitive and it is in the interests of individuals to do everything they can to avoid or minimise such costs.
In this article I’ll outline some of the most common charges that may be encountered and how the risk of them can be lessened.
Unauthorised overdraft related fees:
The first (and biggest) category of bank fees relates to the fees that are associated with going into an unauthorised overdraft position. There are two ways that this might happen. Firstly, if a person doesn’t have an agreed overdraft, they will be deemed to be in breach of their account terms and conditions if they allow their balance to drop below zero. Or, alternatively, if I have an agreed overdraft of $1,000 but my balance drops to -$1,001 then again I will be deemed to have got into an unauthorised overdraft position.
The charging structures operated by banks for unauthorised overdrafts can differ but the main categories of fees that may be operated includes:
– Unauthorised overdraft service fee: This tends to be a one-off monthly fee and will be applied if you go into an unauthorised overdraft position any time during the month. It may be triggered even if you are only a few cents beyond the allowed threshold.
– Unpaid items charge: Having got into an unauthorised overdraft position, you will most likely incur further charges every time that you try to undertake further transactions that the bank has to reject due to lack of funds.
– Paid Referral charge: Similar to the unpaid items charge except that the bank will have decided to allow the transaction to go through.
It may be rather obvious but, of course, the way to avoid unauthorised overdraft fees is to manage your account in such a way that you never exceed your allowed limit. Careful budgeting can help in this respect but you should also make use of banking services such an Online Banking and Mobile Phone Banking to keep an eye on your balance. Many banks now offer their customers the ability to set up text alerts that will notify them when they are nearing their overdraft limit, which is a great way to ensure you stay on top of your finances.
It’s also important to note that banks typically don’t apply fees provided that a customer stays within their agreed overdraft limit. Therefore, if you fear your balance dropping below zero it may be prudent to speak to your bank about setting up a modest overdraft facility. This can act as a buffer zone for those rare occasions when your costs are higher than normal. You should remember though that you will be charged debtor interest when in an agreed overdraft position and you should look at your overdraft as a contingency option rather than an extension of your monthly salary!
In instances when you do go into an unauthorised overdraft position, the guidance is to rectify your balance immediately and to not carry out any further debit card transactions until you are sure that money has cleared into your account.
Finally, if you know that you are likely to have a short-term financial deficit, then make sure that you speak to your bank before you go overdrawn. They may be prepared to offer you an overdraft extension and will be much more sympathetic than if you only approach them after you’ve breached the account limits.
Account subscription fees:
Some banks charge a monthly subscription fee in relation to the checking/current account and this fee applies no matter what level your balance is at. In the UK, such fees can be avoided by selecting a fee free current account, which will give you access to all the standard current account functionality but which won’t typically provide some of the additional “value-added” benefits that the subscription fee accounts offer. If free banking accounts are not available, then you still have the option of shopping around to find the account that has the lowest subscription fees.
Cash machine transactions within the UK are typically free of charge from most bank-branded cash machines. However, there has been a growing trend for ATMs to be placed in pubs or at other non bank locations that charge a flat fee for cash withdrawals. The ATM should display whether charges are applied and you should avoid such machines. Additionally, fees will be levied if you use your card outside the UK. Bringing sufficient foreign currency and/or traveller’s cheques can help you avoid such nasty costs. Alternatively, make one big withdrawal rather than many small ones.
In some other jurisdictions, fees may be applied if you use a cash machine that doesn’t belong to your bank. In such cases, it clearly makes sense to endeavour to always stick to your own bank’s cash machines.
There has also been a gradual trend away from using cash for transactions, so you always have the option of making payments electronically, by check/cheque, or by debit card which avoids the need to make an ATM cash withdrawal.
Mortgage early redemption fees:
Typically incurred on fixed rate mortgages if you decide to switch to another mortgage product. Shopping around when you are choosing your mortgage is important and you may wish to consider the pros and cons of going with a variable rate mortgage rather than a fixed rate mortgage.
That’s a quick run through of some of the more common bank fees that can be encountered. There’s no doubt that bank fees are a contentious issue and can be the cause of misery for some individuals. However, there is an onus on individuals to operate their accounts and cards in a responsible fashion and doing so should mean that most individuals will never or very rarely encounter such fees.