I Keep Overdrafting and Getting Hit with Late Fees. Where Do I Start?

“Timing is everything!” How many times have you heard that in your life? It applies to your finances also. It’s never fun to get a notice from your bank that your payment has been declined due to insufficient funds. And there’s usually more bad news, fees! Most banks charge between $15-$40 for an overdraft, some add daily fees for each day your account is overdrawn, and there are returned check charges and late fees. You’re on the hook for paying all these fees in addition to making a deposit to fix the negative balance in your account. If you don’t correct the negative overdraft balance it may be sent to a collection agency. That will be reported to the credit bureaus where it will be added to your credit report, negatively impacting your credit score. 

Your issue may be as simple as having too many bills due at the same time during the month. Your employer’s pay cycle (weekly, every two weeks, etc) may or may not match up with the timing of your monthly bills. You can’t change how often or when you get paid, but you can usually tweak your due dates because your creditors do want to get paid on time. In this case, start by creating a bill calendar or simple spreadsheet to help you visualize the dates you are paid and when your bills are due. List your pay days (1st, 15th, etc) and the net amount you receive (after taxes.) Then list your bills (rent, utilities, car payment, credit card, etc) along with the expected amount (some will vary) and the date they are due to be paid. Now, review to see if there’s enough coming in (pay) to cover what’s going out (the bills) day by day. You could be making enough every month but the schedule could mean you’re coming up short on some bills every month just because of timing. If there are too many bills for one pay period, contact your creditor to see if you can move your due date to better align with your pay date. You can also move around any auto pay subscriptions or memberships to better match your income schedule. 

Another reason people overdraft is not understanding the difference between a debit card and credit card, specifically when the money actually comes out of your account. A debit/ATM card is directly connected to your checking account and the money comes out immediately when you use it. A credit card is essentially borrowing money for the item you’re purchasing, and you send a payment to credit card company later. Even though you don’t pay for credit purchases immediately, you should keep track of what you’ve spent and “earmark” the money in your checking account. That way you know there’s enough there to pay off the credit card before the next due date so you’re not paying interest. In other words, if you put a $50 purchase on your credit card, you should treat that $50 as “spent” in your checking account even though it’s still there. Another good way to manage your credit card balance so it doesn’t build up is to pay cards off a few times a month to keep the balance low, or at zero. This not only keeps you from losing track of how much you owe, it can improve your credit and reduce overspending.

If you’re getting hit with late fees, it may be another timing issue. For example, if your utility bill is due on the 15th, you should actually pay it several days before that to give your financial institution time to send the money. If you pay them on the due date, most likely they will be late. If your problem is remembering to pay them, set up auto bill-pay or create calendar reminders for yourself several days before the due date.

Bank accounts and credit cards sometimes have fees (often called “annual fees”) just for having an account. Check with your bank on balance requirements to have the fees waived and call your credit card companies to ask them to waive the fee based on your loyalty, or by comparing them to another card that has no fee. It’s always worth asking.

Fees on your accounts can add up quickly and are a waste of your hard earned money. They are a great way to save money because they don’t require you to give up ANYTHING. To avoid these in the future, watch your balance closely, move around your due dates, set up low balance alerts, talk to you bank about overdraft protection and consider linking your checking account to another account (savings) to transfer funds when necessary.