Welcome to Money Matters, featuring WSECU's Briana Mickelson, VP, Member Experience. In this ongoing radio segment and blog series, you'll find personal finance advice, spending and saving tips, and information about current financial trends. Gain practical knowledge you can use every day to help you make the most of your money. Explore the latest episode topics each week.
How does overdraft protection work?
Overdrawing from a bank account is fairly common. Last year, 10% of Americans who used a debit card tied to a checking account got hit with at least one overdraft charge. Another 5% paid a fee to cover a transaction that exceeded their balance.
There are a couple of things you can opt into to cover yourself for an overdraft and to make sure your purchase goes through: overdraft coverage and overdraft protection.
This happens when your bank or credit union pays on the transaction. This puts your checking account balance in the negative. It’s basically a personal loan until you reimburse your financial institution.
Fees associated with overdraft coverage typically average $35 per transaction. If that negative balance persists for a few days, some institutions will continue to charge fees until it’s fixed.
This involves your bank or credit union transferring money into your checking account from another linked account, like a savings account, to cover the transaction when your balance is too low.
Fees that come with overdraft protection are usually about $12 per transaction. Keep in mind, more than the exact overdraft amount may get transferred.
For example, your financial institution might transfer amounts in multiples of $50, so if you’re $8 short, they’ll transfer the whole $50 chunk. That might turn into an issue for your secondary account if that transfer amount pushes it below its minimum balance threshold.
Remember, those transfer fees happen per transaction. With debit card use the way it is today, you could be three or four purchases in before you get notified of your overdraft situation. That means a cup of coffee and a tin of mints could run you $80 if you’re not careful.
If you’ve made a payment by check and don’t have coverage or protection, your financial institution may refuse payment and charge you a non-sufficient funds fee that’s comparable to an overdraft fee. Also, the party that received the bad check may demand a fee as well.
1. Lines of credit
If you don’t want to link a savings account for overdraft protection, you can typically link a credit card, personal line of credit or home equity line of credit as an alternative. Keep in mind that you may have to pay interest on the transfer amount in addition to the transfer fee when money is moved. You might get a bill for this that you’ll want to pay off by the due date.
2. Low balance alerts
At most financial institutions, you can sign up for email or text alerts to flag low checking account balances. These give you the opportunity to add funds to your checking account or to delay a purchase, thereby avoiding overdraft fees altogether.
3. Default setting
Without opting in to overdraft coverage or overdraft protection, debit transactions may be rejected by your financial institution when you don’t have sufficient funds. There may be a penalty associated with this. However, a Pew survey found that 68% of respondents would rather have the transaction blocked at the point of sale rather than pay the coverage fees, as they felt the cost of protection wasn’t worth it.
Keep in mind, defaulting on a cup of coffee is a far different prospect from defaulting on your weekly groceries. If important transactions are on your account, overdraft protection might be a good idea.
Overdraft protection can save you from steep overdraft fees and help you prevent issues with your power bill or mortgage during tenuous financial circumstances. You still don’t want to get used spending more than you have. Even with protection, you should focus on exercising healthy money habits to keep the use of overdraft protection to a minimum.
The hidden power of account statements
Often overlooked, your checking and savings account statements are powerful tools for maintaining financial health. Whether monthly or quarterly, these humble financial records summarize all of your account transactions, giving you a clear, concise window into how you spend your money.
There are several important reasons to review these documents on a regular basis. The most immediate is to help you reconcile your accounts (i.e., check the bank’s records against your own) and make sure all charges are accurate. This is especially important if you make a lot of purchases using your debit or credit card.
You can also look out for any new fees, such as overdraft charges. If you have bills that are automatically deducted from an account, you’ll more easily catch any unexpected billing changes (the fewer surprises, the better!).
It’s also a good way to spot fraudulent activity. Although, to be extra careful, you should consider regularly logging into your online account to catch any suspicious activity sooner rather than later.
This begs the question: If you regularly check your online accounts, are monthly statements even necessary?
In short, yes. While hardly glamorous, a monthly summary that paints a broad overview of your budget and spending habits can provide invaluable insight. Not only can it aid your monthly budgeting, but knowing your financial resources is crucial should you be faced with unexpected expenses, emergencies or dramatic life changes.
Fortunately, most financial institutions make it easy to receive either paper or electronic statements — although some charge a fee to receive paper statements, so you can save money by opting for the electronic versions. These will usually appear as PDFs on your online account, or you can choose to receive them directly via email.
If you do decide to go with paper documents, be sure to shred them before throwing them away. Where your financial information is concerned, you can’t be too careful.
Whether printed or digital, there’s a lot to learn from the understated power of these monthly statements, making them the secret weapon in your financial arsenal.
How to control impulse buying
Buying stuff is fun. It feels good. Thanks to a certain online retailer that has implemented a one-click purchase process, it’s super easy too. With a pandemic limiting access to other activities, online shopping has become the de facto pastime.
Unfortunately, it can lead to financial ruin. Okay, maybe that’s too harsh, but impulse buying has become a huge problem.
Let’s look at the numbers.
- 88.6% of adults admit they’ve succumbed to impulsive online shopping.
- 44.5% of people ultimately regret their impulse buys.
- 29% of people find themselves fighting with a family member about their impulse purchase or realizing they didn’t have enough money in their budget for it.
- $81.75 is the average amount spent on impulse buys per online session.
- $17.78 billion is the total amount spent on impulse buys online per year.
So why do people make impulse buys? It’s entertaining and fun; however, sometimes there are other psychological elements at play. For example, impulse buying can be related to anxiety and difficulty controlling emotions.
Dealing with the changes brought on by the COVID-19 pandemic has been understandably difficult for many, and those worries make it harder to resist the emotional urge to spend impulsively. A little retail therapy session may seem like just the ticket to improve your mood.
Sometimes impulse buyers get caught up in the moment and don’t consider the long-term consequences of their spending. They see something and just need to have it.
Concern with image or social status can also lead to impulsive spending. A purchase may be a way to look good in the eyes of others.
If you’re prone to getting caught up in the moment or can’t resist a bargain, the good news is there are steps you can take to control impulse spending. Here are some great strategies to try:
- Make a budget and stick to it. Take a bit of time to put one together if you haven’t already. Then stay within the constraints of the budget. If a potential purchase isn’t included, don’t make the purchase.
- Be patient before you make a purchase. Take a day before you buy that shiny new thing you just found. Once you have a cooler head, ask yourself if you’ll really use it, and see if you can pay cash for it. This removes the impulse and replaces it with intelligence.
- Have a shopping plan. Before going to the store, figure out what you need and what that will cost before you start shopping. Stick to your plan, and you’ll be less likely to overspend. You can reinforce this plan by paying with cash. Bring only the cash you need to prevent impulse buying and overspending. Take it a step further by leaving debit and credit cards at home.
- Take the emotion out of it. Having a great day? You buy something for the thrill. Having a bad day? You buy something to feel better. These are examples of emotion-based shopping. And each of these is spending you don’t need to do.
- Don’t try to keep up with the Joneses. If you constantly compare yourself to others, or if you’re always trying to impress others, you’ll never be satisfied. Appreciate what you have. This perspective will help you cut back on impulse buying.
- Avoid social media. Scrolling past everybody’s highlight reel in your newsfeed can exacerbate the problem of impulse buying, not to mention all the ads that get shoved in your face, promoting the idea of an impulse buy. Take a week off of social media and see if you notice a difference.
- Stick to your financial goals. Paying off your mortgage, saving for retirement, and getting out of debt can be harder to do with your money slipping away on impulse buys. Keep those goals in mind so you can focus your money on what’s most important.
The occasional impulse buy can be harmless. Just keep it occasional, and that little pick-me-up won’t turn into a big financial problem.
The benefits and drawbacks of prepaid debit cards
Not everyone has a great credit score or qualifies for a traditional bank account or credit card, but in this increasingly cashless world, in-person and online purchases regularly require you to brandish a shiny piece of plastic to seal the deal.
That’s where prepaid debit cards come in handy. Whether you’re rebuilding your credit, trying to budget more effectively or don’t qualify for a traditional bank account, these front-loaded cash cards aren’t tied to a bank account and don’t require a credit check.
They also come with other advantages. In addition to traditional and online purchases, many prepaid debit cards can be used for ATM withdrawals, writing checks or paying bills online. Some even offer rewards or cash back similar to rewards credit cards.
Another benefit is privacy. You don’t have to disclose any credit or debit card information during an online purchase. This is especially helpful for parents who use cards to allow their children some financial autonomy but worry about their safety.
Using a prepaid debit card won’t help your credit score, but it won’t hurt because you can’t spend more than what’s actually on the card. In other words: no penalties and no overdraft fees. When funds get low, you simply add money by cash, check or direct deposit.
There are a few drawbacks, though. Reloadable cards don’t have the same liability or fraud protections that come with traditional bank account debit cards (although network-branded cards, i.e., Visa, MasterCard, American Express and Discover, do provide more protections). You also shouldn’t expect all the same services that typically come with traditional bank accounts.
Another potential downside: fees. Prepaid debit cards can get a bad rap due to the excessive fees charged by some less scrupulous services. Most prepaid debit cards do charge a nominal activation fee, and many charge for specific transactions, such as ATM withdrawals. If you do a little shopping around, you should have no problem finding a card with reasonable terms.
For anyone excluded from traditional banking — or trying to keep a rein on their spending — prepaid debit cards may be the perfect plastic solution that every modern transaction needs.
Tune in to STAR 101.5 weekday afternoons at 5:50 p.m. to hear money tips and ideas to make your dollars go further, featuring WSECU's Briana Mickelson.
You can visit the Money Matters page on star1015.com/sponsored/money-matters to read more money management advice from WSECU.
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Content provided by WSECU, edited by Sinclair Broadcast Group.