How to Avoid Overdraft Fees

Overdrawing your checking account can be really easy to do—and really hard on your budget. Banks and credit unions are allowed to charge not just an overdraft fee but also a “non-sufficient funds” (NSF) fee, sometimes multiple times per day. These fees have been so excessive that the Consumer Financial Protection Board launched an initiative in early 2022 to reduce what it called "exploitative junk fees."

Following the launch of the initiative, several major banks announced the elimination of NSF fees on checking accounts. However, many banks continue to charge NSF fees. And overdraft fees are still out there and can mean a serious hit to your finances. 

Here are some tactics to help you avoid withdrawing more than the balance in your bank account.

Fix cash-flow issues

Sometimes an overdraft could be just a question of timing. Suppose that your Social Security benefit hits your account on the first of the month, and you’ve set up electronic payment for a utility or credit card bill on the fifth of the month. Usually there’s enough in your checking account to let the payment go through.

Now suppose that the previous month had higher expenses than usual, or that you forgot to record a couple of debit card transactions. Your account doesn’t have quite enough to cover the bill. Next thing you know, you’re being charged an overdraft fee.

The solution: Contact the credit card company or the utility and ask to change the due date(s) to the second week of the month. That will give you a few extra days to make sure the account has enough money.

[ Read: How to Budget for Retirement ]

Balance your checkbook

It’s essential to keep track of all your transactions: automatic payments, debit-card swipes and that check you wrote for the Girl Scout cookie sale. Knowing what’s in the account is the best way to prevent overdraft fees.

That includes knowing when funds will become available. For example, if you have a job that pays through direct deposit, the funds typically must be available to you on the business day after the banking day the deposit is made. But other transactions, such as the check you just deposited, might not show up in your account right away because processing often takes place overnight. 

In addition, some banks have a cut-off time for deposits in branches or ATMs. A deposit you drop off late Friday might not be recorded until Monday—and unavailable until Tuesday at the earliest. If you’re living on a tight budget or have had cash-flow issues in the past, be sure to check your available balance (online or by phone) before making any payments. 

The CFPB suggests signing up for “low balance alerts” through the bank, credit union or another service. Carefull provides this protection as part of its “Carefull Guard” service and will alert you if you don’t have enough funds in your account to cover upcoming bills. Knowing you’re at risk of an overdraft can save you a ton of money on fees. 

Sign up for overdraft protection

You can link another account, such as savings, to your checking. That way, instead of overdrafting the account, the bank will move money over to cover the transaction. 

You’ll likely be charged a fee for the transfer, but it will be less than the cost of overdraft and NSF fees. Depending on the institution, you may be able to avoid the fee if you quickly deposit enough cash or move money electronically to cover the transaction. 

[ Read: How to Stay on Top of Your Bills ]

Create a buffer

If possible, build yourself a cash cushion. Do this by depositing some money into checking without recording it. Then you simply pretend it isn’t there. 

How much you’ll need depends on the size of your budget. But even an extra $100 could mean the difference between paying a fee and not paying a fee if you accidentally overdraft.

Seriously: Do your best to forget about this cushion. Otherwise, you might start thinking, “I can afford to treat my friend to lunch on her birthday because of the cushion.” Then, the cushion will be smaller than it should be. A few more such treats and the cash buffer might be gone entirely.

‍[ Read: 12 Ways Retirees Can Save Money ]

Switch to the envelope method

This is a cash-based budgeting system that divides available income among envelopes labeled for each monthly expense category. Instead of using a debit or credit card to pay for gasoline, lunch out or whatever, you use cash from the corresponding envelope.

Not everyone is comfortable having large amounts of cash in the house. One workaround is to get cash for only a few categories—say, groceries, gasoline and entertainment—each month.

If the money starts to dwindle, it’s a signal to pay attention to what you spend. Speaking of which, there’s another important tip to keep in mind …

Create a household budget

As the old saying goes: Follow the money. To build a workable budget, track your expenses for the next month or two to see where and how you’re spending. This can help you plug any leaks. (Hint: It’s easy to overdo it when you’re out with friends or grandchildren. The money just melts away.)

Does that mean you can never have any fun again? Of course not. Budgets aren’t punishment for misbehavior. Think of it as a spending plan: You plan where your money will go to get the best results. A popular example is the 50/30/20 budget:

• No more than 50% of after-tax income for needs (food, shelter, utilities)
• No more than 30% for wants (movies, vacations, gifts, etc.)
• The rest (20%) for debt repayment and savings

Instead of spending without any thought or plan, you follow the budget. That way you’ve paid all your bills yet still have leeway both to spend on the things you want and to set aside a certain amount each month in an emergency fund. Getting control of your cash helps keep you from depleting your checking account—and not depleting your checking account means no more overdrafts. 

[ Keep Reading: What Retirees Should Know About Direct Deposit ]