9 ways banks may penalize you and how to avoid these pesky fees
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 non-sufficient funds fees are pricey. Consumers pay as much as $17 billion annually in these fees, according to 2017 Consumer Financial Protection Bureau (CFPB) estimates.
“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. Here are nine things to game plan against to help keep the money scoreboard showing in your favor.
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 and can 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 savings account or money market account if you think you might need some of it during the CD’s 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 — 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 a bank that either doesn’t charge these fees or one with requirements you’ll be 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
Overdrafting is spending more than you have, resulting in a negative bank account balance. This could be caused by mismanaging money or accounts. 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.
Keep an eye on your account and know the minimum balance needed, says Coake.
“Or [know] ‘I’m about to write a big check, and I don’t have enough to cover it,’” says Coake, a former assistant branch manager.
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 says.
The average overdraft fee was $33.26, according to Bankrate’s 2019 checking account and ATM fee study.
How to avoid this fee: Know your checking account balance before using your debit card or writing a check. That’s the best way to avoid this fee. But that can be easier said than done.
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.
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 you this 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. This may also be called an extended overdraft 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. Just make sure you pay your credit card to avoid paying interest.
6. Excessive withdrawal fees
Savings accounts and money market account are subject to Regulation D. This means you can’t exceed six withdrawals in a month in these types of accounts.
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 non-interest-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 truly there for emergencies.
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.
7. 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 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
8. 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.
9. ATM withdrawal fees
ATM fees can quickly add up. The total cost of withdrawing money from an out-of-network ATM was $4.72, on average, according to Bankrate’s 2019 checking account and ATM fee study. The ATM surcharge is $3.09 and the fee to use the other bank’s ATM is $1.63, on average.
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.
Planning can make a big difference
You’ll be able to avoid nearly all of the above penalties and fees by 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.
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