Paying fees is a part of life. There are convenience fees, fuel surcharges, extra baggage fees, account maintenance fees, ATM fees… Fees and surcharges are everywhere and avoiding them can be something of a sport!
One of the biggest offenders in the annoying fee game are financial institutions. Their fees are not only high, but they also target those least able to pay them…
To help you in your fee avoidance strategy, we’re going to give you strategies to avoid, or at least, minimize them.
First of all, you should know that banks make a ton of money off of fees. Overdraft fees alone generate $27 billion in revenue for banks. And it isn’t getting better. Free checking accounts have dropped from 76% of all accounts in 2009 to 37% today. And fees themselves have risen 21% of the past 5 years.
By calling something a fee, instead of a loan, lenders can avoid regulators and charge whatever they want. For example, if you buy a $20 lunch, but don’t have funds in your account to pay for it, your bank can lend you the money to pay for the lunch. For that loan, you will get charged a $27 overdraft “fee”. For the sake of argument, instead of calling a fee, let’s call this a loan (which really, it is). Your $27 “fee” would be equal to a loan with a 3,520% interest rate! Woooowww!
Payday lenders are the champions of this fee game. The have been restricted from charging exorbitant interest rates, so now they play with fees. And if you convert their fees into interest rates, many payday loans bear interest of over 100%.
Another fun game that banks play is to reorder transactions to maximize overdraft fees. Some banks will process transactions from largest to smallest, so if a big purchase puts you into debt, the smaller transactions will each trigger an overdraft fee. Even if you think you’ve done the right thing and waited to make the big purchase until the last minute, the reordering can cause a cascade of fees can be shocking.
So here are a few tips:
- Never set foot in a payday lender, and if you have, pay off the loan and never go back. Banks fees may be fee heavy, but payday lenders are terrible. Go here to this great payday lender parody site to see what payday lenders really charge.
- Overdraft protection may sound like a great idea, but the fees you pay can be astronomical. Many banks automatically opt you into the programs. You can opt out. Facing the embarrassment of a rejected is often better than being charged overdraft fees. It can also help to find out your bank’s fee policy. Click here for a great list of banks and their overdraft charges policies. And if you can, make sure you keep a buffer of cash in your checking account.
- While debit cards are great, they are the main reason people get dinged with overdraft fees. If you are running out of funds in your checking account, consider using your credit card for a few days until your paycheck clears. If you have room on your credit card, interest on a few extra charges will almost always be lower than overdraft fees.
- If you need overdraft protection, consider an “overdraft transfer”. It’s a form of overdraft, but uses one of your own secondary accounts to fund your overdraft. The fees are still high, but lower than a standard overdraft.
- To avoid other account fees, try to find a no-fee checking account. They still exist, but are hard to find. They all have limits to what you can do, but try to find one that has no account balance minimums, like BankMobile. Click here for more options
- USE CASH! Remember cash? Try this for a month: Take out what you need at the start of each week and only spend that amount. You’ll never overspend because you only have what you have, and you’ll limit transaction fees and ATM fees because you only need to go to the bank 4 times a month. And no overdraft or insufficient fund fees! Easy.
It’s getting hard to avoid fees, but it is possible. And there is increased pressure on banks and lenders to at least be clear about the fees that they charge.
And remember, the more you save on fees, the more money that you have to invest!