How to avoid late and overdraft fees
Editor's Note
Late fees and overdraft fees can be a way for issuers and banks to pad their wallets as well and penalize consumers for being late on payments. It's estimated that credit card late fees cost American families $12 billion annually.
But what are these fees? And is there a way to avoid them altogether?
Here's a closer look at late fees, overdraft fees and how you can avoid paying them.
What are late fees?
Late fees are fees you pay when you don't make your minimum credit card payment on time. The cutoff time before you're late varies by bank.
Some credit card issuers require you to pay by 5 p.m. Eastern time (the end of their business day). Others allow you to pay until midnight on the due date. Thus, it's important to know your credit card issuer's policy. Paying after this time can lead to fees as high as $41 for each late payment.
However, if you make your minimum payment by the cutoff time, you won't pay a late fee. Remember that making only the minimum payment will lead to interest on your credit card bill.
Related: How to save your credit score after a late payment
How to avoid late fees
Making the minimum required payment by your bank's cutoff time means you won't pay a late fee. Again, check with your bank to see what time it uses to determine when payments are late on the due date.
Paying the minimum amount due will help you avoid late fees and other penalties, such as raised interest rates or annual percentage rates.
However, paying only the minimum amount due can lead to other expenses, such as interest on your credit card balance. The best way to avoid paying interest on credit cards is to pay your full balance each month.
If you're likely to forget your bill due dates, setting up autopay on your credit cards can help you avoid missed or late payments.
Related: TPG's 10 commandments of credit card rewards
What are overdraft fees?
While late fees are assessed on credit cards, overdraft fees are related to your checking account. These fees are assessed when your account goes negative. How can that happen?
Overdraft fees come from either overspending on your account or spending money from your account before it is available. The latter can happen when deposits (such as a large check) are put on hold temporarily, but you make withdrawals in the meantime, thinking that money is already available.
Thus, your account balance goes below zero in these instances, which is an "overdraft." Banks typically assess fees for this — $35 per instance, on average. These are similar to the fees related to "bounced checks" — when you write a check that is rejected due to insufficient funds in your account.
How to avoid overdraft fees
Ensuring you always have a positive balance in your bank account and not making check or debit card payments that are higher than your current balance sounds simple. However, there are several factors involved.
First, be careful with holds placed on your deposits. If your bank won't make a deposit available for five days, that means you cannot use that money for bill payments or withdrawals until it's available. Spending against unavailable deposits will cause an overdraft.
Additionally, holds placed on your debit card can cause overdrafts. For example, if a hotel places a hold for incidentals on your debit card, the funds may not be released to your account (becoming available to you) for several days after you check out. Until that money becomes available, you can't spend or withdraw it. Your usable account balance may be lower than you think it is when there are holds on your debit card.
Related: 5 things you need to know about debit and credit card holds
Thus, it's important to understand exactly how much money is available in your checking account when you make a purchase or withdraw cash. You also need to understand the timeline your bank uses to determine when your deposits become available, since that may not be instant.
Related: 4 reasons why you shouldn't use your debit card
Bottom line
Consumers don't like paying excessive fees. However, there are methods you can employ to avoid these fees. Paying your bills on time, closely monitoring your account balances, and understanding holds placed on your account can help you avoid these fees altogether. Spending within your means may be the most important tip of all.
The fees discussed in this article may be more common for those struggling to manage debt. If that's you, here are some resources that may help:
- How to consolidate and pay off credit card debt
- Here are 3 reliable ways to pay off credit card debt
- 6 simple rules to stay out of credit card debt
- Why Dave Ramsey is wrong about credit cards
- 6 things to do to improve your credit score this year
- Know your rights: 3 tips for dealing with debt collectors
- 8 basic financial services and credit card concepts you should know