How to Avoid Late Fees and Overdraft Fees for Good

Late fees and overdraft fees are some of the most frustrating money you can spend. You get nothing for them, and they tend to arrive when money is already tight. A single overdraft can trigger a fee, then a returned payment, then a late fee from the company you were trying to pay.

The good news is that most of these fees are avoidable with a few changes to how your accounts are set up and a little attention to timing.

How these fees work

Late fees are charged when a payment arrives after its due date. Credit cards, loans, utilities and landlords all charge them. On a credit card, a late payment can also cancel a promotional rate and, if it’s significantly late, may be reported to the credit bureaus and affect your credit score. Exactly when a late payment gets reported, and how much a late fee can be, depends on the lender and on the rules where you live.

Overdraft fees are charged when you spend more than is in your checking account and the bank covers the shortfall. Non-sufficient funds (NSF) fees are charged when the bank declines the payment instead. Some banks have reduced or dropped these fees; others still charge them, sometimes more than once a day. Your bank’s fee schedule will tell you exactly what it charges.

A worked example of how it can snowball:

• Checking balance: $40.
• A $120 utility autopay goes through: the bank covers it and charges a $35 overdraft fee. Balance: −$115.
• A $6 coffee and a $45 grocery trip post before payday: two more overdraft fees of $35 each. Balance: −$236.
• Total fees: $105, on $171 of spending.

Policies differ (many banks don’t charge for small overdrafts, and some cap the number of fees per day), but the pattern is common enough to plan against.

Prevention: the account setup

Choose how your bank handles overdrafts

Many banks let you choose whether debit card purchases and ATM withdrawals that would overdraw your account are declined or covered for a fee. If you’d rather have a card declined than pay a fee, ask your bank to decline them. Rules for this vary by country, so ask your bank how it works for your account.

Link a savings account for overdraft transfers

Most banks can automatically move money from a linked savings account to cover a shortfall. There may be a small transfer fee, but it’s usually much less than an overdraft fee. Check the cost before you set it up.

Consider a bank with no overdraft fees

If your bank charges overdraft or NSF fees and you’ve been hit by them more than once, it may be worth looking at banks and credit unions that don’t charge them.

Keep a buffer

A buffer is an amount you leave in checking that you treat as zero. Even $200 to $500 absorbs most timing mistakes. Build it gradually: put $25 or $50 from each paycheck into it until it reaches your target. Once it’s there, a bill landing a day before payday stops being an emergency.

Prevention: timing

Line up due dates with paydays

Many lenders, card issuers and utilities will move a due date if you ask. Moving bills to a few days after payday removes a lot of risk. If you’re paid on the 1st and 15th, putting most bills between the 3rd and 10th, and the 17th and 25th, keeps them well clear of the days your balance is lowest.

Use a bill calendar

Put every bill and every payday on one calendar, with a running balance. You’ll see in advance which days are tight. (Our post on bill calendars walks through building one.)

Pay a few days early

Payments can take a business day or more to arrive, especially across weekends and holidays. Aim to pay three to five days before the due date. Paying early never costs more and removes the risk of a payment arriving late.

Know when deposits actually clear

Your paycheck may be “pending” before it’s available, and checks you deposit may be held for a day or more. Don’t schedule bills against money that isn’t available yet.

Prevention: automation, used carefully

Autopay for minimums

For credit cards, setting autopay for at least the minimum payment means you’ll never be late, even if you forget. You can still pay more manually each month. (Our post on autopay covers the trade-offs.)

Low-balance alerts

Set an alert to warn you when your checking balance falls below a level you choose, such as your buffer amount. A warning a few days before a bill is due gives you time to move money.

Bill-due reminders

Reminders a few days before each due date are useful even for bills on autopay, because they prompt you to check the money is there.

If you get charged anyway

Ask for a refund

Call the bank or company and ask them to waive the fee. Be brief and polite: “I’ve been a customer for six years and this is my first late payment. Could you waive the fee?” Many companies will waive an occasional fee, especially for customers with a good history. It doesn’t always work, but it costs nothing to ask.

Fix the cause, not just the fee

After any fee, ask why it happened:

• A timing problem? Change a due date or schedule payments earlier.
• A forgotten bill? Add it to your calendar and set a reminder.
• Not enough money? Look at the budget for that month. A one-off shortfall might mean building a buffer; a recurring one means the budget needs work.
• A surprise charge? Find out what it was. Annual renewals and price increases are common culprits.

If fees are becoming regular

If you’re paying overdraft or late fees most months, it’s a sign that money is consistently short at certain points in the month, not just a timing slip. A budget, a buffer and possibly a conversation with a nonprofit credit counselor can help. If you’re behind on bills, contact the company early; many have hardship programs that are easier to arrange before an account falls far behind.

How much you could save

If a household pays one $35 overdraft fee and one $30 late fee a month, that’s $780 a year. Even cutting that to a couple of fees a year saves more than $600, which is money you could put into the very buffer that prevents the fees.

Tools that help

Kemback can send alerts for low balances, bills due and bank fees, by email, in the app and as iPhone notifications, so you hear about a problem before it becomes a fee and notice any fee that does slip through. Bills sit on a calendar matched against real transactions, and safe to spend and a 90-day projected balance show whether money will be there when each bill comes due.

The short version

Keep a buffer in checking. Ask your bank to decline rather than overdraw. Move due dates to just after payday. Pay early, set alerts, and use autopay for minimums. And if a fee does land, ask for it back and fix whatever caused it.

#late fees #overdraft fees #bank fees

This article is general information, not financial, tax or legal advice. For decisions about your situation, talk to a qualified professional.