Insufficient funds: Decline the transaction or pay an overdraft fee?

When looking to make purchases and payments on a regular basis, it’s important to make sure that you have enough money available. There are times when an individual doesn’t have enough money to make a purchase and therefore faces the dilemma of either spending more money than they have and paying a fee or not completing the transaction because you don’t want to get hit with a fee.

Those who have insufficient funds will often need to make a decision of whether or not to pay a fee or decline the payment/purchase. In order to resolve this situation, there are a number of things you can do such as paying the fee if you can afford it, limiting the number of times you pay these fees, decline the transaction, or use other accounts to make the purchase.

Have you ever been at a cash register getting ready to pay for something and you’re hoping that you have enough money to cover the transaction? Many people don’t want to deal with the possible embarrassment of having their transaction declined due to insufficient funds. The major banks realized this and they came up with the idea of “overdraft fees”.

Let’s take a look at what these overdraft fees really mean and if they are good for you, or just good for making the banks more money:

What is an insufficient fund –

Insufficient funds occur when someone tries to purchase an item using a check or debit card without having enough money in his or her bank account to cover the purchase. As a result of insufficient funding the check will bounce or for debit purchases, the transaction will not be completed, and the ATM machine or cash register will return an error message of “non-sufficient funds” or NSF.

A study done by the FDIC found that overdraft fees usually ranged from $10 to $40, with a median average fee of $34 per transaction. In addition, one-quarter of the banks surveyed charged an additional fee as long as the account remained in arrears. Previous surveys have shown that these additional fees are sometimes as much as $5 or $10 per day until the account has positive funds available. Many banks allow credit and debit card transactions to go through, even if the card user is over their credit limit or has insufficient funds in their checking account.  The transaction would process, and the card user would get hit with an over-limit fee and possible additional penalty fees each day.

Some people would go over the limit with a small transaction, like a cup of coffee or pack of gum and end up paying an NSF fee of $35 so that coffee just cost them $39 or $40 total. Add in any additional over-limit fee or continued NSF fee to that cost and you’ve got yourself one very expensive latte! The banks contended that this was a service to their customers and that customers would rather pay an overdraft fee than face the embarrassment of having their transaction declined at the register.

Pay the fee if you can afford it –

If you ever encounter a situation where you are looking to make a purchase and have insufficient funds, you can choose to pay the overdraft fee if you can afford it. Whenever the fee is not going to be too costly, just pay it as long as it won’t create a major dent in your budget. Fortunately, for consumers, these fees for over drafting an account are usually one time fees but double check with your bank on that. If you’re in a situation where you are unaware of how much money you have in a given account and mistakenly overcharge it, then paying the fee won’t be too much of a problem.

If you pay fees try to limit the frequency –

While paying the overdraft fee might be more convenient at times, it’s important to limit the amount of times you pay it. If you incur these fees on a regular basis, it will get very costly and put you in a difficult financial situation. While you may underestimate how much money you have in an account, you should try to limit how many times you make a transaction when there are not enough funds to cover a given purchase or expense. In order to keep your finances in good shape, make sure that you don’t pay this type of fee on a regular basis. If this happens on a regular basis then it’s time to consider that you might need some help like credit counseling or possibly a debt management program.

Don’t complete the payment –

Paying a fee for not having enough funds may be a small price to pay, but it is usually best to decline such a transaction. If you know that there isn’t enough money in your account to cover a given expenditure, then it will be in your best interest to refrain from completing the purchase or payment. This will allow you to avoid paying a fee as well as preserving your funds for other things that may be more important. So it might make more sense to decline completing a payment or purchase whenever you are aware that there isn’t enough money in your account to cover it. You can find yourself in debt before you know it if you continue to make purchases with money you don’t have and then end up owing the bank more money for overdraft fees.

Go over your finances every day –

When it comes to dealing with a situation where you may not have enough money to cover an expense, it’s imperative that you go over your finances before completing a purchase or bill payment. This will enable you to determine whether or not making a payment or purchase is possible and if you will likely be liable for an insufficient fund fee. Taking this particular action will allow you to think twice before spending money and help you avoid the possibility of paying costly fees. With the amazing technology of today, you can see how much is in each account right from your Smartphone with mobile banking. Mobile banking has helped saved many people from making purchases they cannot afford and it has saved them money because they didn’t overdraft and incur any fees. Ask your bank today about their mobile banking options!

Use another account if possible –

Anyone that faces a situation of possibly spending more money than they have and paying overdraft fees will want to look into possible alternatives. One of these alternatives is using other accounts. If you have a bank account or savings account that has enough money to cover expenses, then use that to pay a given expenditure. With other accounts, you will be in a position to ensure that you avoid costly fees as well as being able to successfully make a payment or purchase without losing too much money. Many banks allow you to have several accounts under your name. For instance, you may have an “everyday spending” account or a “growth savings account” or you may even have a separate account for “overdraft protection”. Talk to your bank and find out what your options are so you’re never put in that position of having to decide whether you should take the NSF fee or decline the transaction.

Review your bank’s policies –

Regulations require that banks have their customers “opt-in” if they want to continue to make purchases with insufficient funds and pay the overdraft fee. We always recommend that everyone keep careful records and know exactly how much they have left in their bank account or on their credit limit so that overdrafts or declined purchases are never an issue, to begin with.  We also recommend that people suffer a little embarrassment rather than create even more debt with overdraft fees and penalties. It’s a smarter financial move to have your purchase declined than to allow an expensive overdraft fee. Those fees can really add up and you might find yourself in over your head before you realize it.

Bank of America has announced that they are going to stop courtesy (free) overdrafts altogether.  There will be no opting in. According to an article about this in the New York Times, “In the case of an overdraft, 93 percent of the fees are generated by just 14 percent of the customers who exceed their balances five times or more a year, according to a 2008 study by the Federal Deposit Insurance Corporation.” The bank will continue to provide overdraft protection, for a fee, for checks and automatic payments. Consumers who try to exceed their balance when making an A.T.M. withdrawal are already being notified that they will be charged a $35 overdraft fee if they choose to proceed.

The article also said, “Last year alone, banks generated about $20 billion from overdraft fees on debit purchases and A.T.M. transactions, and $12 billion more by covering checks and recurring bills, according to Moebs Services, an economic research firm.”

That means a relatively small amount of people are paying a lot of money as a result of keeping poor financial records and making poor financial choices. Don’t pay $40 for a cup of coffee because you didn’t realize you only had $1.50 left in your account. Use mobile and online banking to keep track of your finances so you don’t have to incur these outrageous fees and penalties.

Problems with overdraft programs –

If you make a purchase that puts your checking account balance into the red, known as an overdraft, your transaction will likely be declined or if it goes through you will incur a fee. Banks offer programs such as “overdraft protection” to help you out in the event of an overdraft, but they carry fees of their own and they’re usually steep ones.

Consumers who opt into overdraft protection programs pay more than 7 times as much in overdraft and insufficient funds penalties, averaging around $450.00 a year, based on a recent report from the Consumer Financial Protection Bureau. Deciding whether or not to opt-in for overdraft protection services and knowing the potential costs can help you minimize or avoid these fees in the future.

Conclusion –

Depending on whether you’re a college student reading this or someone who has been out in the workforce for a while, maybe you’ve run into the issue of insufficient funds before. Regardless, it’s a good topic to periodically review just to keep it fresh in your mind.

You might be interested to know that other terms for insufficient funds are also used interchangeably. You’ve most likely heard another term that describes the same situation. It’s called an overdraft.  Inside the walls of a bank, it’s also known as non-sufficient funds (NSF), so you may even see that on your statement or e-mail/text message alerts.

If overdraft fees or insufficient funds fees have you drowning in debt, then give Advantage CCS a call today. The call is completely free and one of our certified credit counselors can take a look at your current financial situation and help you come up with a game plan to get you out of debt as quickly as possible and save you money in the long run. You can visit us online at www.advantageccs.org to Live Chat with a counselor right now!

Would you rather pay an overdraft fee or have your purchase declined? Let us know in the comments below. Thanks!