3.5 Avoiding Overdrafts

Notes

An overdraft happens when you spend more than your balance and the bank pays the difference.

• The bank may charge an overdraft fee each time, even for a small purchase. Or it may decline the payment.
• Example: balance $40, purchase $55, overdraft fee $30. Balance $= 40 - 55 - 30 = -45$, so you owe $45.
• Ways to avoid it: track your balance, set low-balance alerts, keep a small cushion, and choose a plan that declines transactions instead of charging fees.
• Overdraft protection can link savings to checking to cover shortfalls, often at a lower cost.
• Pending transactions and automatic payments can lower your balance before you expect it.