Home / Blog /
Financial Wellness
Financial Wellness

The Dangers of Overdraft Fees

Overdraft fees can be one of the most significant sources of stress on a budget, especially for those living paycheck-to-paycheck.
January 22, 2024

Using a debit card has a number of advantages for consumers, especially in terms of convenience. For those who can maintain a healthy balance in their checking accounts, debit cards and checks are useful financial tools. However, for those on a tighter budget, making payments from your checking account comes with the extra responsibility of avoiding overdraft fees.

Overdraft fees can be one of the most significant sources of stress on a budget, especially for those living paycheck-to-paycheck.

These are fees that banks or financial institutions charge accountholders who make purchases that withdraw more funds than they have in their accounts.

How Overdraft Fees Harm Financial Health

Overdraft fees, which average about $30, are among the highest fees that banks charge accountholders. Consumers paid roughly $34.9 billion in 2017, the highest level since 2009, according to research firm Moebs Services. That was up 3% from the year prior.

Many consumers hit by overdraft fees are those living on the edge with low account balances. If you’re not aware that your bank is charging an overdraft fee, you could face a downward financial spiral as the fee becomes part of your debt.

If you don’t pay your overdraft fee quickly, interest can compound. With a larger debt obligation and higher monthly bills, you can find that your cash flow is more restricted, and you may not even have access to funds to pay for life’s necessities.

Especially for those living paycheck-to-paycheck, overdraft fees can create the need to take on even more debt to pay for costs like food, bills or emergencies like hospital visits or car repairs. Someone who doesn’t have the cash on hand may turn to other forms of debt like taking out a cash advance on a credit on a credit card or accepting a payday loan with exorbitantly high interest rates.

Ways to Avoid Overdraft Fees

The best way to avoid overdraft fees is to decline overdraft coverage for your accounts, or never opt in in the first place. This means that while a transaction you may want to make without enough funds will be declined at the register, but it also means that you won’t be charged an overdraft fee.

If you do want to keep overdraft coverage in the event of an emergency, you’ll need to keep a close eye on your account balances. One way to do that is to set up an alert for when your account reaches a low balance. Some financial institutions allow you to set up email or text alerts when your available funds drop below a certain level.

How Companies Can Help Employees Avoid Overdraft Fees

Employers can help employees steer clear of overdraft fees, including by providing an option for affordable emergency cash flow in the form of early wage access.

Earned Wage Access allows employees to access their earned wages before their scheduled payday.

Rain’s on demand pay platform is among the growing number of fintech organizations providing this Earned Wage Access service for medium and large companies that want to help their employees improve their financial health.

See more posts