By Lina Martinez

One of the most important things you can do is avoid ever getting an overdraft fee. They can start a downward spiral which can quickly destroy the finances of anyone living paycheck to paycheck, as so many of us now do.

You only need to know that banks love these things to know that they are bad for you. The fact that fees make up half of all bank profits says something. Yes, it means you are the one paying those fees, and overdraft fees are the absolute worst.

The normal overdraft fee is about $35. Banks have some different standards as to how many they will charge you a day and when the fees start. Often the bank will offer a few dollars of leeway before the charges kick in. One is bad enough but if multiple charges come through in one day you will find yourself in the, “Oh holy hell, I’m really negative” territory. In one day, it is possible to amass fees of over $100. This can compound on itself for days if pre-authorized transactions continue to come through.

Worse still is receiving a non-sufficient funds (NSF) fee. That is basically the bank saying, “Well this charge kind of wanted to come through but it was risky and we didn’t pay it. As a bonus we charged you $35 though.” How kind of them. The worst part about NSF fees is that charge that was rejected might be resubmitted by the payee several times. If there aren’t funds put in the account right away, more NSF fees could follow.

It is pretty much agreed that payday loan companies are evil, blood sucking, money vampires, but overdraft fees are even worse. If it were considered a loan, a $35-dollar fee on a $15 charge for three days works out to approximately 28,000 percent interest when annualized. That number again is 28,000 percent. Having your legs broken by a loan shark’s strong man when you are late paying actually sounds preferable.

One fee can create a downward spiral if things like your Netflix subscription bill come through while the account is negative. As more and more fees accrue, you may find yourself in truly bad shape when the next paycheck gets deposited into your account. Now the chances for more overdrafts are even higher. Add in the fact that the bank will post the largest charges in front of the smaller ones, and the recipe for disaster is created.

Overdraft fees are killers of the sacred financial stability but there are steps you can take to avoid them.

Your bank offers you the choice of being able to overdraft your account when you use your debit card. Make sure this is turned off. If you don’t have it, don’t spend it. Knowing you don’t have that option in the future will make you more attentive to your finances.

Pre-authorized payments will come through regardless of having turned off the ability to overdraft your card. A Netflix payment could go from $9 to $44 dollars really quick. If you find that every month you have just enough and no more, turn off as many auto pays as you can and schedule the payment dates in your smart phone instead.

Cut back on your expenses. Sure, everyone dishes out this financial advice but hopefully the knowledge of what these fees are really costing you helps with that decision. Your cable TV is a great form of entertainment but if it is the cause of repeat overdrafts ditch it.

If you have received your first overdraft in a long time, don’t hesitate to call your bank. Most banks have a provision to refund some or all of your charge if you are not a repeat offender.

If in a situation where you even consider overdrafting, tell yourself that interest is something you pay to consume now. Remember that the actual interest rate if this were a loan is in the 10,000% + range and ask yourself if it is worth it. More than likely, it isn’t.

If your bank allows you to link a credit account or savings account to your checking account, do it. Most banks charge fees for this as well but it is still a better alternative. DO NOT rely on this though. It is only to be used when an absolute necessity.

Avoiding overdraft and NSF fees is one of the most crucial first steps in creating financial security. If you have been receiving them in the past, breaking the downward spiral will feel really good. You might be shocked at how much more money you see in your account in a short period of time.

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Feature photo courtesy of Flickr, under Creative Commons Attribution-Noncommercial license

Lina Martinez is a contributor of zenruption and frequently writes on issues relating to personal finance. She once got an overdraft fee and started crying. Needless to say, the bank reversed the charge. It is now her mission to never get another one.