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In football, getting called for a penalty can result in lost yardage. But when it comes to banking, being charged a penalty can be costly for your hard-earned money. That’s why it pays to steer clear of triggering them.
Common penalties such as overdraft and nonsufficient funds fees are pricey. Even as some banks have recently been reducing overdraft fees, the average overdraft fee across checking accounts was $29.80 in 2022, according to Bankrate’s checking and ATM fee survey.
“They’re all avoidable as far as I’m concerned,” says Ashley Coake, certified financial planner, at Cultivate Financial Planning in Radford, Virginia.
Knowing the most common penalties and fees on banking products, and how you can avoid them, can help you save cash.
1. Early withdrawal penalties on CDs
CDs typically charge an early withdrawal penalty if you close them, or take money out, before the term ends. Early withdrawal penalties are costly and can reduce your gains or even cut into your principal. Some banks don’t allow partial withdrawals, so that all-or-nothing mentality needs to be a part of your planning process.
An early withdrawal penalty on a five-year CD may range from 150 days to 540 days. But these penalties may vary.
How to avoid this fee: Determining when you’ll need your money is the best way to avoid early withdrawal penalties. Also, knowing the purpose of the funds is critical to avoid this penalty. Put a portion of the money into a high-yield savings account or money market account if you think you might need some of it during the CDs term. Also, you may want to consider a no-penalty CD.
“Just really think ahead,” says Pam Horack, certified financial planner, at Pathfinder Planning in Lake Wylie, South Carolina. A one-year CD is probably not the best option if you’re currently looking to buy a house, Horack says.
“If you’re concerned that you might spend that money and that’s why you want to put it in a CD, put it in a savings account at a different institution than your regular checking account — just to make it a little bit harder for you to get to,” says Horack, who previously worked as a branch manager, teller and customer service representative.
2. Early closeout fees on accounts
CDs aren’t the only banking products that charge a fee if you close them too soon. At some banks, closing an account too soon will cost you. Banks with this fee usually assess it if you close the account in the first 90-180 days.
How to avoid this fee: Research whether your account has one of these fees. Know that you’ll need to keep one of these accounts open for the required time to avoid the fee. Keep this, and the minimum balance, in mind before opening the account.
In reality, if you plan to close an account this quickly it might not be the right time to apply or the right fit for you.
3. Maintenance fees
Some banks charge a maintenance (or monthly) fee if you go below a certain balance in your account. Banks may charge these fees to encourage deposits or certain balances. This helps banks guarantee you’ll either have a certain amount in your account or you’ll be paying a fee.
Maintenance fees usually range from a few dollars to $25. Banks that have these fees usually waive them if you maintain your balance above a specified amount or have a direct deposit set up. Making a certain number of transactions or being a student may also waive the fee at some banks.
How to avoid this fee: Check the fine print and choose either a bank with no monthly fees or one with requirements to avoid the fees that you’re able to meet. Be strategic about your banking choices. Use your direct deposit to help waive fees in one account. For other accounts, look for banks with either no minimum balance requirement or a low one.
Online banks — banks that don’t have physical locations — usually don’t charge these fees. So these types of banks should be included in your search.
4. Overdraft fees
When you spend more than you have in an account, this results in an overdraft, or a negative balance. For instance, you may have plenty of money in savings. But you write a check out tied to a checking account and forget to transfer the money needed to cover it fully from your savings. Or it could be a cash flow issue, with income coming in the near future.
Making purchases with a credit card, instead of a debit card, can be a way to avoid overdraft fees. But you’ll need to pay off your balance every month in order to avoid interest, Coake, a former assistant branch manager, says.
How to avoid this fee: Know your checking account balance before using your debit card or writing a check.
Using a credit card for purchases will also avoid overdrafts. It buys you some extra time, since you don’t have to pay for these purchases until your statement payment is due. But make sure you pay it then, otherwise high annual percentage rates (APRs) could be more expensive than overdrafts over time.
Alternatively, find a bank that has eliminated its overdraft fees. Some banks that have eliminated or significantly reduced their overdraft fees include Capital One, Citibank and Wells Fargo.
Savings overdraft protection may have no transfer fee in some cases. Or it could have a lower fee than standard overdraft fees. Savings overdraft protection is when your savings backs up your checking account.
5. Sustained overdraft fees
Some banks may charge a sustained overdraft or extended overdraft fee if you have a negative balance for too long. In some cases, you might not have the money so it’s just adding to the problem. However, if you have the money in another account, make sure you transfer it over quickly to avoid this fee.
How to avoid this fee: Monitor your accounts and set up alerts. Being aware of your balances and budgeting can help make sure you have cash on hand for these circumstances.
Using a credit card for purchases during this time, and using cash to make your account positive quickly, can buy you some time until the statement balance is due. Make sure to pay the credit card debt back to avoid being charged interest.
6. NSF fees
Similar to overdraft fees, nonsufficient funds (NSF) fees are charged when you don’t have enough money in a checking account to pay for a transaction. However, NSF fees differ from overdrafts in that you don’t end up with a negative balance — rather, the transaction is simply declined.
NSF fees can be lofty — $26.58 on average, according to Bankrate’s 2022 checking account survey. While they’re somewhat less common than overdraft fees, 87 percent of accounts still charge NSF fees.
How to avoid this fee: As with avoiding an overdraft fee, it’s important to regularly check your account balance, especially before making a large purchase. Consider setting up low balance alerts if you use a mobile banking app.
Many banks that don’t charge overdraft fees also don’t charge NSF fees. You could consider switching accounts to eliminate the possibility of getting this fee altogether.
7. Excessive withdrawal fees
Savings accounts and money market accounts are often limited to six withdrawals per month. This limitation exists because of a former federal regulation, Regulation D, which enforced banks to cap withdrawals from nontransaction accounts. The regulation has been removed, but most banks have kept the savings and money market account limitation in place.
Many banks will penalize you by charging you an excessive withdrawal fee if you exceed that limit. Some may close the account or move it to a noninterest-bearing account.
How to avoid this fee: Keep track of the number of times that you withdraw from your savings account in a month. Try to use your savings and money market accounts as infrequently as possible so that the funds are there for emergencies and specific goals.
Since the limit doesn’t apply to ATM withdrawals or trips to the teller, stick to these methods for withdrawing money, if you’re getting close to the monthly limit. Put more of a buffer in your checking account, and less in your savings, if you’re needing to transfer money often from savings to checking.
8. Paper statements
Receiving statements in the mail can cost you, as many banks now charge paper statement fees. Some banks may waive the fee on their top-tier accounts. Typically, there isn’t a fee for electronic statements.
How to avoid this fee: Sign up for paperless e-statements when you open your account or when you first login to your new account. Check online or with your bank to make sure paper statements do not incur a monthly charge.
9. Fees for transferring your money
Banks typically charge you for official bank checks and wire transfers. Sometimes a bank will even penalize you for receiving funds via wire transfer. So it’s important to know if your account charges this fee.
How to avoid this fee: Wire transfers are often used when you need to get money somewhere fast. Planning ahead could make these unnecessary. Also, see if a bank has free wire transfers or other payment options, such as Zelle, that will allow you to move money to others quickly. A service like Venmo may also help you reimburse others for smaller purchases.
Your bank may offer an Automated Clearing House Network (ACH) transfer option. Make sure it doesn’t have a fee and or limit the amount you can transfer.
10. ATM withdrawal fees
ATM fees can quickly add up. The total cost of withdrawing money from an out-of-network ATM is $4.66 on average, according to Bankrate’s 2022 checking account and ATM fee survey. The average ATM surcharge came in at $3.14, and the average fee to use other banks’ ATMs was $1.52.
How to avoid this fee: Many banks either have a large ATM network or waive ATM fees if you use another bank’s machine. Look for a bank that won’t charge you an ATM fee for machines convenient to you.
11. Dormancy fees
A dormancy fee, also known as an inactivity fee, is charged when there’s no activity on an account for a certain period of time. After a specified amount of time that varies by state, banks must escheat the funds of inactive accounts, meaning they’re required to turn the funds over to the state. Dormancy fees are designed to limit this from happening by incentivizing customers to keep their accounts active.
Not all banks charge dormancy fees. For those that do, the fee can range anywhere from $5 to $20, and the amount of time that must pass before the fee is charged is typically between a few months and a year.
How to avoid this fee: Don’t open more accounts than you’re able to keep track of. It can be useful to have multiple accounts — such as to keep separate savings funds in — but it’s important that they each serve a purpose and that you’re regularly transacting on each account.
Planning can make a big difference
The most important step for avoiding nearly all of the above penalties is keeping track of your transactions and saving.
“A little bit of pre-thought into what you’re doing and making sure you understand the rules around your account will help save you a lot of money and frustration,” Horack says.
— Bankrate’s René Bennett contributed to an update of this story.