Debit cards are a responsible solution for people who want an easy way to make and track everyday purchases without having to use a credit card. So how could a consumer end up with an overdraft fee?
Overdrafts occur when there isn’t enough money in your account to cover the costs of your spending. Most of us have experienced being short on cash at some point or another, and even with bad credit you can get a personal loan when funds are tight.
If overspending happens regularly, it may be time to consult with a debt relief service.
Recent regulations may give you some flexibility in how charges are handled after the balance of your account has reached zero, but in general, these are the most common ways debit card use can overdraft your account:
1. Purchases Were Not Properly Tracked
Physical checks are becoming a thing of the past, and check ledgers are even more outdated. A series of shopping trips, filling up a tank of gas, and a few online purchases for a movie or MP3 download can all add up to more money spent than you realize.
Tracking these purchases to the penny, as they happen, is the only way to ensure you don’t miss out on all the money you’re spending.
2. Recurring Charges Can Be Debited Early
If you authorize your health insurance or a mortgage payment to be taken directly from your bank account each month, you probably agreed upon a payment date with your provider, such as the 15th or the 30th.
Holidays, weekends, and glitches can all contribute to these payments being taken out early, however, and money can be removed as many as four days prior to the scheduled date. If you are not prepared with adequate funds, this transaction can cause future debit card actions to overdraw your account.
3. Pending Authorizations Can Be More/Less Than What’s Owed
Fueling up your car or checking into a hotel results in a certain amount of funds held from your balance to ensure future payment. These held amounts (which show on your card activity as “pending transactions”) can be larger or smaller than the actual amount you owe, making it hard to plan ahead for purchases while waiting for the true charge to clear.
If you are unsure how much money is being held, ask the retailer at the time you provide your debit card info. They should be able to let you know the pending charge amount so you can better manage remaining funds.
4. Transactions May Only Be Updated Every 24 Hours
While most banks are moving to more up-to-the-minute reporting tools (many of which are available via mobile apps), some are still hanging out in the Stone Age and may only update your online balance every 24 hours.
If you’re relying on transaction activity to determine how much you have left to spend, this will only complicate attempts to keep your account from being overdrawn.
Track all debits as they happen and rely on your own accounting, rather than the bank’s, to be sure you have enough to cover all purchases.
Pros & Cons of Allowing or Not Allowing Overdrafts
Since the bank will often let you choose whether to have transactions that exceed your balance declined at the register or allowed to process (which will overdraft your account), it’s worth considering which option is best for you.
Here are the details of each choice:
Allowing an overdraft:
- Your account will go into the negative
- An overdraft fee will be charged per transaction
- No added cost of a returned check to the retailer
- No late fees to the person you paid
Not allowing an overdraft:
- You will receive a “declined” message at the register
- No charges will post to your account once balance reaches zero
- Checks written on your account may be returned
- Returned check fees may be imposed
- Unpaid checks may result in late payment fees from service providers
- Retailer or service providers may refuse to take checks from you in the future
Note: Many banks will offer overdraft protection for their account holders in good standing.
Having the option to post charges to your account even when it’s empty, however, can keep you in business during the occasional rough patch.
Overdraft protection usually comes with a monthly or annual fee, in addition to any possible fees imposed per transaction. You are also expected to pay back all money within a prompt time frame, usually within a month.
The example to the right is the Citizens Bank Debit Card Overdraft Coverage. As you can see, their customers are charged $35 per overdraft charge without the protection plan.
Money in Savings Prevents Overdrafts and Card Declines
If all else fails, it may be time to start padding that emergency savings account for times such as these. It’s usually free to connect your savings to your debit card account to cover any overdrafts that may occur. This is usually a fee-free way to keep purchases paid and your accounts in good favor with the banks and creditors.
Photo credits: wisegeek.com, empowerfcu.com, citizensbank.com