How to Avoid Overdraft Fees and Still Benefit from the Loan?

For Example, Krishna, a college student, took a ₹10,000 loan for his expenses. One month, he forgot to track his spending – his balance dropped to ₹500 when a ₹1,200 EMI was due. The bank charged him a ₹500 overdraft fee, leaving him with -₹1,200. Next month, Krishna set balance alerts and kept ₹2,000 extra. When his EMI was deducted, his balance stayed positive. No fees, no stress! What steps did Krishna take to fix his money mess? Let’s find out in the blog!

Steps To Avoid Overdraft Fees:

1. Monitor Your Account Balance

To avoid overdraft fees, it is very important to monitor your account balance regularly. In today’s digital age, keeping an eye on your balance has become easier through mobile banking apps and SMS/email alerts. This helps you manage your expenses effectively and avoid unnecessary charges.

Importance of Account Balance Monitoring

If you check your account balance regularly, you can avoid untimely fund transfers or unnecessary spending. This also helps you avoid overdraft fees.

Example: Impact of Account Monitoring

Key Takeaways

• Low Balance Alerts: Set low balance alerts through your bank’s mobile app or online banking. These alerts will notify you when your balance falls below a certain threshold.
  
  
• Regular Monitoring: Check your account balance after every transaction, especially when automatic payments are scheduled from your account.
  
  
• Overdraft Protection: If your bank offers overdraft protection, understand the terms and conditions before opting in. Some banks charge overdraft fees, while others provide a grace period to cover the negative balance.

By taking such proactive steps, you can avoid overdraft fees and manage your finances better.

2. Opt Out of Overdraft Protection

Overdraft protection is a facility that allows your bank to approve transactions even when you do not have enough money in your account. But for this, you have to pay overdraft fees. If you opt out of overdraft protection, you can avoid unnecessary fees because when you do not have enough funds, your transactions get declined, and no fee is charged.

Benefits of Opting Out of Overdraft Protection

• Saving on Fees: When you opt out, if your account does not have enough money, the bank will decline your ATM or debit card transactions, but you won’t be charged an overdraft fee.
  
  
• Financial Discipline: When transactions get declined, it helps you control your spending and stay within your budget.
  
  
• Avoiding Unexpected Charges: Overdraft fees can sometimes be as high as ₹2,000. By opting out, you can avoid these unexpected charges.

Example: Opt-Out vs Opt-In

Key Takeaways

• Opt-In: Your transactions get approved, but you have to pay a fee for every overdraft.
• Opt-Out: Your transactions get declined when funds are insufficient, but no fee is charged.

If you opt out of overdraft protection, you can avoid unnecessary fees and have better control over your finances. You can contact your bank or use the online banking portal to opt out of overdraft protection.

3. Use Budgeting Apps or Alerts

Overdraft fees can turn a small mistake into a big expense. But if you use smart tools like budgeting apps and bank alerts, you can avoid these fees and use your loan wisely.

Let’s take the example of Sid, who is a college student in Bengaluru. Sid took a personal loan of ₹10,000 and has a tight monthly budget. He has set low balance alerts on his bank account and uses a budgeting app.

Example:

In this example, if Sid had not set low balance alerts, he would not have known that his balance was getting low. But through alerts, he came to know his balance was low and could have controlled his spending. However, if he does not take action even after getting the alert, then an overdraft fee can be charged.

Tips for Sid and You

• Use Budgeting Apps: Apps like Rocket Money or Hiatus track your spending and send low balance alerts.
  
  
• Set Bank Alerts: Set low balance alerts through your bank’s app, so you know when your balance is going down.
  
  
• Monitor Your Account Regularly: Check your account balance daily or weekly to know how much money you have.
  
  
• Maintain an Emergency Fund: Keep a small emergency fund so that you can use it when needed and avoid overdraft.

In this way, students or professionals like Sid can manage their finances better, avoid overdraft fees, and use their loans in the right way.

4. Link a Savings Account For Protection

One smart way to avoid overdraft fees is to link your checking account with your savings account. This way, whenever your checking account balance becomes zero or negative, the bank automatically transfers money from your linked savings account to complete the transaction. This process is automatic and costs less than an overdraft fee. Some banks charge a small transfer fee, but it is much lower than the overdraft fee.

Let’s understand with an example:

In this example, when Raj activated overdraft protection, his checking account didn’t go into a negative balance, and he saved ₹35 on an overdraft fee. Only a ₹10 transfer fee was charged, which is much cheaper.

To activate overdraft protection, contact your bank or use the online banking portal. It is a simple process that helps you avoid unnecessary fees and makes your financial transactions smooth.

5. Consider Alternative Banking Options

Nowadays, many banks and credit unions offer overdraft policies that are more consumer-friendly. Some institutions allow you to overdraw your account up to a certain limit without any fee, or they give you a grace period in which you can bring your account back to a positive balance without a penalty.

By exploring such options, you can avoid unnecessary overdraft fees and improve your financial management.

Example: Traditional Bank vs. Consumer-Friendly Bank

From this table, it is clear that consumer-friendly banks like Bank B help you to avoid the ₹35 overdraft fee and also give a grace period to bring your account back to positive.

Examples of Such Banks and Credit Unions:

• Chime: With its SpotMe® service, you can overdraw up to ₹200 without any fee, as long as you have automatic direct deposit set up.
  
  
• Truist Bank: Truist One Banking accounts allow you to overdraw up to ₹99 without an overdraft fee. If your balance goes ₹100 negative, additional transactions are declined.

6. Balance Your Chequebook

Overdraft fees, which can go up to an average of ₹2,314 per transaction, can seriously affect your financial health. Regularly balancing your chequebook is an effective strategy to avoid these fees. It helps you keep track of your transactions, spot errors, and prevent your account from going into overdraft.

Importance of Balancing Your Chequebook

Balancing your checking account means keeping a record of all your deposits and withdrawals so that your actual balance matches the bank’s records. This process helps you understand your spending habits, detect fraud, and avoid overdraft fees.

Example: Chequebook Balancing

In this example, a ₹20,000 ATM withdrawal on April 12 was not recorded, which made the account go negative. As a result, the bank charged a ₹2,000 overdraft fee.

Tips to Avoid Overdraft Fees

• Regularly Check Balance: Frequently check your account balance so you know how much money is available.
  
  
• Set Up Alerts: Use banking apps to set low balance alerts so you can take timely action.
  
  Maintain a Cushion: Keep a minimum balance in your account to cover unexpected expenses.
  
  
• Use Budgeting Tools: Use budgeting apps or spreadsheets to track your expenses.

By regularly balancing your chequebook, you can not only avoid overdraft fees but also manage your financial goals more effectively.

7. Use Direct Deposit

Direct deposit is a financial tool that helps you avoid overdraft fees and makes your loan repayment process smoother. When your salary or income is directly deposited into your bank account, you always have timely funds available, which helps you stay away from overdraft charges.

Benefits of Direct Deposit:

• Avoiding Overdraft Fees: With regular direct deposits, your account balance usually stays positive, which reduces the risk of overdraft fees.
  
  
• Automated Loan Repayment: You can set up auto-debit for your loan EMIs. This ensures timely repayment and helps you avoid late fees.
  
  
• No Account Maintenance Fees: Many banks waive off monthly maintenance fees if you have direct deposits coming in.

A Detailed Example:

In this example, in March, the expenses were ₹60,000, while the direct deposit was ₹50,000. Still, the account only went ₹10,000, and no overdraft fee was charged because the direct deposit helped cover the EMI on time.

8. Avoid Automatic Payments

Automatic payments (auto-debits) are common nowadays, but if you do not have enough money in your account, they can lead to overdraft fees. If you are unsure whether your account has enough funds, avoiding or adjusting automatic payments can be a smart financial decision.

Risk of Overdraft Fees from Automatic Payments

Auto-payments are helpful because your bills get paid on time, but if your account balance is low, they can trigger overdraft fees. Overdraft fees are usually between ₹2,000 and ₹3,000, which can increase your financial burden.

What Should You Do?

• Choose Manual Payments: If you do not have enough funds in your account, cancel auto-payments and go for manual payments.
  
  
• Set Low-Balance Alerts: Use your bank’s mobile app or online banking to set alerts. This helps you keep track of your account balance.
  
  
• Adjust Auto-Payment Amounts: If possible, adjust your auto-payment amounts based on your account balance.

Example:

In January, the auto-payment was ₹12,000, but the account balance was ₹10,000, which led to an overdraft fee of ₹2,500.

In February, a manual payment of ₹12,000 was made when the account had ₹15,000, so no fee was charged.

In March, the auto-payment was ₹7,500, and the account had ₹8,000, so again, no fee was charged.

If your account does not have enough money, avoiding or adjusting automatic payments is a smart move. This can help you avoid unnecessary overdraft fees and manage your money better.

Conclusion

Overdraft fees can add up quickly and hurt your finances, but you can avoid them with simple steps. Always keep an eye on your account balance and set up alerts to warn you when funds are low. Opting out of overdraft protection can save you from unnecessary fees, while linking a savings account can cover shortfalls at a lower cost. 

Using budgeting apps, direct deposits, and balancing your chequebook helps you stay in control. If possible, choose banks with better overdraft policies. By managing your money wisely and avoiding automatic payments when funds are tight, you can prevent overdraft fees and keep your finances healthy.

FAQs

1. How can I avoid overdraft fees?

Monitor your account balance regularly and set up low-balance alerts. Opt out of overdraft protection or link a savings account for backup funds.

2. What should I do if my account balance is low?

Turn off automatic payments and make manual payments instead. Keep extra money in your account as a buffer to avoid going negative.

3. Are there banks that don’t charge overdraft fees?

Yes, some banks and credit unions offer no-fee overdraft policies. Check with your bank or switch to a more customer-friendly option.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?