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How to Avoid Huge Overdraft Fees & Keep Overdrafts Costs Low

Overdraft Fees May Be a Necessary Evil, But You Can Keep Costs Down

Why do banks charge such high overdraft fees? The simple answer is because they can. And it isn’t likely that this is going to change any time soon. However, with a little careful planning, and a willingness to change banks when necessary, you can keep your own overdraft costs to a minimum.

Fees are at record highs, and likely to stay that way
It wasn’t that long ago that when an account went into the red, the banks charged interest on the negative amount, and that interest rate was in keeping with the predominant interest rates of the time. Then, in 2008, the world experienced the biggest financial shock since the Great Depression. Banks were facing phenomenal losses from bad loans, compounded by many of those loans being rolled up in derivatives that were proving to be virtually worthless.

The banks withdrew the access to credit from all but the lowest risk customers, and business ground to a virtual standstill. In its attempt to encourage lenders and borrowers to return to business as usual while preventing runaway inflation, the government dropped interest rates to record lows, which are projected to remain at their current levels or dip even further. The ultimate result for the banks has been a dramatic drop in income, as savers and investors alike seek better returns on their investments.

Limited in the rates they could charge for overdrafts, the banks got creative and began charging fixed fees for every overdraft, rather than merely charging interest on the amount, and they have raised the fees six-fold over the last eight years. Considering that the cost of borrowing has remained historically low, the dramatic increase in customers’ cost for dipping into the red has reached a level best described as extortion, even as high as four times as expensive as taking out a high-interest payday loan to cover the shortfall. Barring the unlikely decision to impose further regulatory constraints on the banks, or the even more unlikely decision by banks to actually reduce their cash inflow, it is a situation that will probably stay with us for some time.

Of course there are alternatives to overdrafts, some of which may work better for you in certain situations.

How to avoid overdraft fees

Shopping for cash
As noted above, there are other ways to cover a short-term cash shortfall, virtually all of which are less costly than paying overdraft fees which are frequently even more than the amount of the shortfall. For a consumer who has good credit, it might be less expensive to take out a loan in an amount sufficient to cover the projected shortfalls over a relatively long period such as a month or quarter than to pay individual overdrafts. A more expensive but also more conservative option would be to take out an instalment loan or the above-mentioned payday loan, with the latter being particularly useful for customers with less than ideal credit or those whose cash requirements are immediate, rendering the longer processing and approval time on a more traditional loan unwieldy.

Before deciding what kind of loan to get, you need to familiarise yourself with the pros and cons of each type of loan. Once the type of loan has been decided upon, shopping around at different lenders can result in you getting the loan that is most closely structured to your needs, schedule, and repayment capabilities.

But if you must use overdrafts…
How much overdrafts will cost you depends upon several factors, most of which are under your control. Naturally, if you only use overdrafts occasionally to cover a brief delay in receiving expected payment, the costs can be minimised, whereas if you’re one of those customers whose account dips into the red several times a month, your costs are going to be higher, likely much higher. If you fall into this group, don’t despair, because you’re far from alone. Keeping the overdrafts to a minimum is obviously the most economical choice.

If it is unrealistic for you to limit your overdrafts, at the very least, you will want to see if your bank offers a better deal, such as lower charges for overdrafts under a certain amount per transaction or per month. Under such an arrangement, you can lower the cost of overdrafts, but only if you don’t exceed the limit in your overdraft agreement. Overdrafts in excess of that limit will incur higher fees and higher interest, to boot. If your bank does not offer any kind of breaks for regular overdraft users or sets a limit on the authorised overdrafts lower than you’re likely to need, you might want to start looking into moving your accounts to a bank that is more accommodating.

As expensive as they are, overdrafts are sometimes your best bet for covering an expense or stretching your money. But if you’re giving away too many of your hard-earned pounds to the bank, it may be time for you to make a change.

About admin

I am not Martin Lewis but Martyna aka Money Saving Girl. When I first came to the UK I was on a super tight budget, so I know how hard it is not to have money or how to get creative to get 'more for less'. I share with you my money saving tips about anything which worked for me. Be it free samples, shopping tricks, iTunes, various discount apps, websites and reward programs. Occasionally I write about traveling or insurance.

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