An overdraft occurs when customers deplete their bank accounts to the extent that it has not only no funds left but also has a negative balance. This immediately equates to an unauthorized loan which will be liable to hefty fees and interest charges. The simple remedy to avoid this scenario is to be aware of the level of funds available in ones checking account and ensure that spending does not exceed the current balance.
Bank accounts can go overdrawn for any number of reasons, but generally, unless they are the result of a bank error, are down to consumer negligence. Authorizing automated payments with insufficient funds to cover them, bouncing checks, overspending, and being so near the limit that a bank fee tips one into overdraft, are typical reasons consumers going overdrawn.
Whilst the majority of bank customers do not go overdrawn a regular 10 percent of customers do so, and account for 90 percent of all overdraft fees, with a median fee of $26, according to statistics cited by Newsweek. Once a consumer is overdrawn further fees will be added for each further unauthorized transaction. The surest way to remedy the situation is to make a deposit to bring the balance back into the black, ensuring that all related fees are also covered. Simply carrying a negative balance of $1 can result in further fees.
Consumers who go consistently overdrawn have another problem to consider if they fail to address the issue speedily. They run the risk of the bank reporting their account to Chex Systems which can ultimately result in their account being closed, which thus makes it difficult to open a future checking account. This will also impact negatively on ones credit history.
Far more consumers anticipate being overdrawn than actually overdraw their accounts, thus enabling the banks to profit by selling overdraft protection. According to USA Today the median fee for overdraft protection is $35. Federal Reserve regulations which came into effect in 2010 preclude banks from automatically applying overdraft protection to new accounts. Customers must thus elect to use overdraft protection if they think it is necessary.
A very simple and less costly way of ensuring checking accounts do not go overdrawn is to come to an arrangement with the bank to automatically transfer funds from a savings account to prevent a negative balance. Average fees for this service are around $10 and thus equate to a big saving compared to an unauthorized overdraft fee.
Customers can also arrange for an authorized overdraft on their accounts which provides a certain leeway of expenditure after the current balance has been exceeded. It is worth while to comparison shop to see which banks offer the best terms and lowest overdraft fees if funds are regularly close to the wire. Opting for a checking account that pays interest on balances is an ideal way to build up a balance which gives an inbuilt buffer zone.
The fees and expense of going overdrawn are simply not worth it. If it is an unavoidable situation due to mismanagement of funds it is better to take preventative steps than to allow it to happen. Even the fees on a one off pay day loan, which can provide the funds to ensure the account does not go overdrawn, are worth paying rather than a number of charges which being overdrawn can result in.