overdraft fees

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What are overdraft fees and how can I avoid them?

When money is withdrawn from a bank account and the available funds are either zero or below, this is known as an overdraft. As your bank account goes into a negative balance, your account is considered overdrawn.

You can arrange an overdraft agreement with your bank. After you've done this, you can then overdraw so long as you stay within the limit you've agreed on with your bank. If you stay within the limit, the interest will be lower because you've stayed within the boundaries of the arrangement. However if you exceed the agreement, more fees will and a higher interest rate will be charged to you.

There are three main types of overdraft that you can get from your bank.

  1. Opting out. If you don't want an overdraft, don't get one. It's as simple as that. What this means for you is you can't make a transaction with money you don't have. There's no overdraft fee, however, depending on your bank there may be a non-sufficient funds (NSF) fee.
  2. Overdraft transfer. This option is called “overdraft protection”. This option links your transaction account to different accounts, like a savings account. Some banks will automatically transfer money from your savings account to your transaction account if the balance is too low to handle further transactions. Banks typically charge a fee for these types of transfers.
  3. Overdraft coverage. When you're unable to cover the purchase, the bank will step in and do it for you. This is essentially a short-term loan and is certainly the most expensive out of the three options.

Cautionary tips

Be careful about spending money you don’t have. Overdrafts encourage this sort of behaviour and without restraint, you could wind up in serious debt.

Keep an eye out for compounding fees. You could be charged:

  • An establishment fee.
  • A monthly or quarterly service fee.
  • A higher amount of interest on the amount you borrow.
  • A fee if you break the agreed overdraft limit.

Watch out for “inaccurate” ATM balances. Depending which ATM you use, the machine may let you withdraw money you don't have, even without an overdraft agreement. So it's possible that you might have an overdrawn account without knowing it.

When you ask for the ATM to display your account balance, that is not always correct. Some of your purchases that you made in the previous days will not be processed by your bank for a few more days so they likely won't appear on your bank statement.

Important note:

If you receive Centrelink payments your bank can take no more than 10% of your fortnightly income to pay off the debt if your account becomes overdrawn.

Quick tips for overdraft management

Here are some tips to help you avoid fees and make the best use of your overdraft:

  • Know how much you can handle

Steer away from spending too much by choosing the lowest possible overdraft.

  • Figure out how much you need to pay back

Collate all the fees that apply to you and figure out if you need to pay off the loan on demand.

  • The faster you pay off your debt, the better position you'll be in

Discover if there's a time limit. You may have to pay your overdraft by a specified time so it's wise to repay the amount you owe as fast as you can to lower the level of interest you might incur.

Once you've paid back the money, it's a good idea to cancel the overdraft so this doesn't happen again.

  • Keep your money to yourself and avoid sharing

This may sound stingy but consider an alternative before you get an overdraft for someone else. If you don't have good money management, you may lose money and risk other valuable assets like your home.

  • Judge your spending habits

Judge your spending patterns. Do you spend more than you have on a regular basis? You will need to sit down and figure out how to better spend your money. Set up a budget and use some apps that help you make better use of your money.

Jacob Joseph

Jacob is a writer and video journalist with finder.com.au. Credit cards, personal loans and savings accounts are his bread and butter, and he likes nothing more helping people understand the sometimes overly complex world of personal finance.

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