Overdrafting: Kick this bad financial habit

Though we all know that overdrafting your bank account is bad, it’s also something that we’ve probably done with minimal — if any — consequences. For a few reasons, overdrafting has recently become an easier and more acceptable bad financial habit.

Why overdrafting has become more common

Overdraft protection

Before overdraft protection, you had to deal with the embarrassment of bounced checks and declined transactions. Although this was less forgiving, it created more motivation to keep close tabs on your checking account. Most banks still charge fines every time you overdraw, but will allow transactions to go through, up to a certain amount, regardless of whether your account currently has the funds to cover it. This is a courtesy known as overdraft protection.

With the competition between banks for customers, overdraft protection has become a key draw for those who don’t want to worry about the consequences of this financial blunder. Some banks make it even easier to overdraw your checking account by allowing you to link it to a savings account. Whenever you overdraw, the bank automatically pulls funds from your secondary account to make up the difference, only charging you a small fee. Without close monitoring of your account, these transfers and small fees can go unnoticed for longer.

Debit cards

Debit cards are a popular way for people to feel more responsible about their spending. Unlike credit cards, they use only funds you have, and transactions are instantaneous, unlike checks that can take weeks to process.

The danger with debit cards is their ease. They’re an easy way to spend money mindlessly; and, while you’re not going into debt knowingly, you can overdraft accidentally, which really isn’t that much better.

Online banking

The world of online banking, coupled with the explosion of personal smart phones, has made it increasingly easier to go paperless with your personal finances. Most banks now offer transaction processing, direct deposit, automatic bill pay, and monthly statements entirely online.

While this is extremely convenient, handling your money less directly leaves room for neglect (out of sight, out of mind) and more potential for overdrafting. Consequences of overdrafting

Fees

While overdrafting might not place you in serious financial danger, it’ll almost always cost you extra money. Take a moment to add up your overdraft fees within the last year or so, and think about what else you could have spent that money on. Unnecessary fees are just another form of wastefulness.

Poor credit score

Contrary to popular opinion, your credit score can be affected by overdrafting. While most banks don’t report overdrafting to credit agencies, some do. If you don’t deal with your 0verdrafts in a timely manner, your account may be closed by the bank (usually after 30 days), which will show up on your credit report.

How to avoid overdrafting

Being aware of your daily checking account balance and recording all your transactions, including scheduled automatic payments, is the surest way to avoid overdrawing your account. Some people are fine with utilizing smart phone apps in conjunction with online banking to keep track of their funds, while others may have to use a checkbook register to keep themselves accountable.

Schedule your automatic payments so that they coordinate with payroll deposits, and keep a mental record of when they come out. When you don’t have to write a check or mail out a pay stub, it can be easy to forget that those funds are already designated.

Keep debit transactions to a minimum. I recommend using your debit card mostly as an ATM card and/or for specific types of purchases. This will eliminate clutter on your account summary and allow you to more easily spot deviations from your budget.

Living in a credit-minded society can make it hard to stick to a budget and live within your means, but you’ve got to do it. These are both habits vital for steering clear of  the charges and bad credit scores associated with overdrafting. Hopefully, the new age of electronic banking becomes a means of increasing accountability — and not of mindless spending.