Protect your accounts from overdrafts and avoid bank fees

Does this scenario sound familiar? You submit a payment that's withdrawn from your checking account, but there aren't enough funds to cover the transaction. So the bank covers it for you. Because the bank did that, you now see a negative balance in your account, and you could even be charged a fee.

We get it. Overdrafts happen sometimes. That's why many financial institutions offer tools to help you understand the impact of account overdraft fees and services to help you prevent them.

Overdrafts and non-sufficient fund fees

An overdraft happens when you spend more money than you have available in your checking or deposit account to cover a transaction such as a purchase, payment or withdrawal. But, the bank pays it anyway, which may result in a negative balance. Some banks may charge a fee when you overdraw your account.

So it would be: A non-sufficient funds fee, or NSF fee, happens when a charge can't be paid because you don't have enough funds. With items like checks, electronic payments and payments made through a bill paying service, the transaction might be marked as unpaid, for example, if you don't have enough money in your account, and you may be charged an NSF fee.

So, while an overdraft fee and an NSF fee sounds similar, they are different. In both cases, you are attempting to spend more than what's available in your account. An overdraft fee is charged when the bank covers the transaction. The NSF fee is charged when the payment is declined or returned. It's not covered by the bank.

In the case of an NSF, you might also be charged a fee by the merchant or biller you are working with. Don't forget about that potential fee as well.

If you're not paying attention to your available balances and transactions, especially recurring payments or withdrawals, these fees could quickly add up. Different banks will have different terms and fees attached to the accounts they offer, so be sure to read the fine print.

How overdrafts happen

Your account's available balance may change throughout the day as transactions occur. Transactions that haven't been presented for payment, such as checks you wrote that your bank hasn't received or payments scheduled through your autopay service that haven't been processed, generally won't be reflected in your available balance amount during the day. Some payments don't process until the end of the day or overnight.

Maybe you forgot about the check you wrote for an emergency plumbing repair. Maybe you accidentally scheduled recurring payments to be taken from your account before the day's direct deposits are scheduled to appear. Or maybe you made a deposit after your bank's business hours, so the deposit won't be processed until the next business day.

Any of these can result in an overdraft and lead to possible overdraft fees. In fact, the late deposit example could result in a fee and a deposit in your account on the same day.

Preventing overdrafts

The first line of defense is tracking your spending and transactions, such as deposits, checks you write, debit card transactions and automatic withdrawals. That way, you know how much you have in your accounts and won't spend more that you have.

Overdraft protection links your checking account to another account, like a savings account. Some also allow you to link a credit card.

Linking to another account means that a purchase or payment that would put you in an overdraft situation can be covered automatically by using funds from the backup account to cover the cost. This helps prevent you from incurring a negative balance.

But keep an eye on the backup account's balance too, because if the backup account doesn't have enough funds to cover the transaction, you may still end up overdrawn and paying fees.

Additional services that can help you track your available balances include:

Account alerts

Receive alerts whenever your account balance falls below where you want it to be.

Remember, pending transactions may not be reflected in the available balance.

Once alerted, you can log on to your account to transfer or deposit funds as needed.

Budgeting tools

Many apps offer tools that can help you track your spending, customize your budget and view all your accounts in one place, which may be able to help prevent you from getting close to overdrawing your account.

All of these features are available with our budgeting tool. Budgeting and spending within a budget are main ways to prevent overspending. Having a well-stocked emergency fund is another.

Before choosing overdraft protection, it's important to assess your financial behavior. Despite your best intentions, you could put your overall financial well-being in danger, even with protection in place. If your savings account acts as your overdraft protection, frequent overdrafts could drain your savings account, hindering your ability to achieve your financial goals.

And if you use your credit card as an overdraft account, overdraft charges to a credit card are usually considered a cash advance and accrue interest from day one. They may also be subject to cash advance fees or higher interest rates. Make sure you review the terms of your credit card before electing to use it for overdraft protection. This could add to your debt balance, sometimes significantly, depending on the card's interest rate and associated fees. As with a regular purchase on your credit card, this must be repaid and failure to repay may impact your credit score.

Talk to your bank about the money management services and advice that are available to help you establish better financial habits. Working together, you can hopefully get to a place where the threat of an overdraft is no longer an issue.