7 Tips For Working Parents to Navigate Child Care While Climbing Out of Debt

December 10, 2021CreditBy toptierfinancial

Children bring endless joy and meaning into our lives, but the costs of raising them can certainly feel overwhelming. According to the U.S. Department of Agriculture (USDA), the average cost of raising a child through age 17 is a whopping $233,610 — not including college tuition.  

It’s no wonder, then, that an Experian study found parents had more debt than their child-free counterparts, and (unsurprisingly) that number increased with each additional kid. Though housing and food round out the top two expenses in the USDA study, child care and education came in third, accounting for 16% of the cost for middle-income families. 

According to Care.com, more than 50% of parents spent more than $10,000 on child care in 2020 — an anxiety-inducing amount for any parent reviewing their budget. But all hope is not lost. Here are some tips for working parents in the search of ways to reduce the burden of child care — which will hopefully help you save enough money to start dialing down those debts.

Delve into your DCFSA

A DCFSA, or Dependent Care Flexible Spending Account, is a benefit that may be available through your employer that can help you save money for child care costs.

Because the account is funded with pre-tax money and you don’t pay taxes when you withdraw it to spend on eligible expenses, a DCFSA can help cut down on overall costs. 

Of course, there are limitations and restrictions on a DCFSA; only certain costs qualify, and there is a cap on how much money you can set aside in the account. (In 2021, the limit was temporarily increased to $5,250 for single parents and $10,500 for parents filing jointly as part of the American Rescue Plan Act, but those numbers are usually $2,500 and $5,000, respectively.) 

Keep in mind, too, that you may not be able to claim the dependent care tax credit if you contribute to a DCFSA. It’s worth sitting down with your company’s HR representative to learn more about whether or not you qualify for an FSA and how much you might stand to save by contributing to one.

Host an au pair 

An au pair — which translates to “on par” in French — is a full-time live-in nanny from overseas, which may sound like something only the wealthiest parents could afford. But as long as you have the spare room to host an au pair, these programs can be surprisingly affordable; the annual au pair fee for one of the most popular au pair programs is less than $10,000, though this doesn’t include all associated expenses. 

Consider your location

Although the cost of child care is expensive no matter where you live, it’s true that location matters: The basic annual expenses to raise a child, per a recent study, add up to a breathtaking $28,785 in the District of Columbia, but only $13,596 in Mississippi. 

Obviously, moving comes with its own costs, both financially and otherwise. But if it’s feasible for your family, choosing an inexpensive place to live could save you thousands of dollars over your lifetime. 

Consider a nanny share

If the idea of hiring a full-time nanny for yourself sounds a little out of reach, you might consider joining a nanny share, which is exactly what it sounds like: you and at least one other family share the services of a single nanny. All of the children are looked after together at once, which also gives your kids more opportunities to play and socialize. 

There are, of course, some important factors to keep in mind if you take this route; it’s important that all sets of parents have similar expectations of the caretaker, and you’ll also have to arrange a suitable schedule that works for all the families. Along with simply talking to local families to see if anyone’s interested, there are also online platforms to match families with nanny shares.

Trade child care with local friends and family

If you’re lucky enough to have willing family and friends nearby — especially ones who also have children — consider setting up a schedule for trading babysitting services amongst yourselves. That way, the kids all get to hang out together and you get to exchange time, rather than money, for child care.

Avoid using a credit card to cover child care expenses

As tempting as it may be to throw those extra expenses on your charge card, keep in mind that compounding interest means you could end up paying way more than the initial price tag if you can’t pay the card down each and every month. 

Additionally, using up too much charge can harm your credit utilization ratio, which is one of the factors credit bureaus use to compute your credit score. 

Discuss flexible work arrangements with your employer

If there was one good thing that came of the pandemic, it’s that more employers than ever are open to flexible schedules and at least part-time remote work — which can be a boon for parents. 

Although young children require the kind of attentive care that can’t be combined with most day jobs, if your kids are older and you just need to be around to pick them up after school (or in case of an emergency), flexibility in your job can help you avoid paying someone else to watch them.

Having kids brings so much fullness to our lives — and with some careful planning and rearranging, we don’t have to empty out our wallets to be parents.

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Unexpected Financial Disasters: Natural Disasters

December 5, 2021CreditBy toptierfinancial

Natural disasters have the potential to be life-changing events. Even if you haven’t lived through one, you have likely seen the impacts they can have on communities and individual lives. Far too often we encounter stories of forest fires, major floods, earthquakes, and the like, and the victims of these disasters who are forced to rebuild their lives in the wake of the damage.

If this happened to you, would you be prepared, and would you know how to limit the financial impacts?

Preparation

We are all at the mercy of mother nature, which means that we cannot directly prevent natural disasters. But we can prepare for them. Not only can we prepare for the physical aspects – having an emergency food kit on hand, boarding up windows before a storm, etc. – but we can also take certain steps financially to make recovery easier and mitigate damages.

Carefully Consider Your Insurance

Insurance plays a huge role in determining the eventual impact of a natural disaster. While it would still be a life-altering event to lose an asset, or suffer extreme damage to an asset like your home, having insurance coverage could eventually “make you whole” such that you don’t suffer a major financial setback.

Typical homeowner’s insurance policies cover many natural disasters, but not all. As Bankrate explains, a standard policy would cover losses “caused by explosion, fire, lightning, hail, windstorm, hurricanes, tornadoes, extreme cold, volcanoes and theft” but would not cover “earthquakes, floods, tsunamis or nuclear disasters.”

Be sure to familiarize yourself with your insurance policy to understand what is covered. Compare this to the risks you are most likely to face and consider extra coverage. Notably, flooding is the most common natural disaster in the United States. While you are required to have flood insurance if you have a federally-backed mortgage and live in a flood zone, you might also consider insurance if don’t meet those criteria.

Consider Preventative Maintenance and Repairs

Particularly in the case of flooding, there may be preventative steps you can take to mitigate flood damage to your home. These steps range from simple maintenance to major overhauls. FEMA has published guidance on this point.

Organize Financial and other Critical Documents

A natural disaster leaves a path of destruction. You don’t want that to include your most important personal and financial documents. Ensure that your important documents are protected, such as in a fireproof and waterproof box (safe). Additionally, you may want to create digital backups of your important documents and store them safely in the cloud.

Among these documents, it may also be helpful to keep a list of contact information for banks and any other financial accounts and your insurers. In the midst of an emergency, communication with these parties can be very important. Regarding creditors in particular, proactive outreach can help you explain the situation you are facing and enroll in any arrangement the creditor is willing to provide in response to the natural disaster

Recovery

Recovery from a financial disaster relates to many of the steps above that you take in preparing for a disaster. Things like following up with your insurance company, and making arrangements with creditors can go a long way to helping you recover most quickly while minimizing negative impacts. Not taking these steps can drag out your recovery and potentially leave you burdened with additional debt.

Every situation is different and the most significant consequences of a natural disaster, like being displaced (losing your home) or suffering significant bodily injury, can make the fallout more severe, and the recovery more significant and complex.

Hopefully these tips will help you at least make an initial plan for natural disasters, but living through one will always be difficult and pose unique challenges, financial and otherwise.

If you would like more guidance about the impacts of a financial disaster to your personal financial situation, or need help recovering from a natural disaster that caused or worsened your debt, our credit counselors are able to help. Contact an NFCC-certified credit counselor today for a free session.

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What Happens When Your Checking Account Goes Negative and What Steps Should You Take?

April 25, 2021CreditBy toptierfinancial

If you get into a difficult financial pinch, you may spend more money than you have and take your checking account below a zero balance. This might be a complete accident based on unfortunate timing—for instance when your account is drafted for a credit card bill or other expense before your paycheck comes in. Or, it may be the sign of a more serious financial issue that you need to address.

If you find yourself with a dangerously low checking account balance here is what you need to know.

Overdraft vs. Non-sufficient Funds

The first important thing to understand in this situation is the overdraft arrangement you have with your bank. An overdraft occurs when there is a transaction against your account that takes the balance below zero. This could be caused by a number of events: a check you wrote, a charge you made with your debit card, an automatic payment that processed, or your attempt to withdraw cash at an ATM. Importantly, banks may treat different transactions differently. ATM and one-time debit card transactions are subject to different rules than checks and ACH transactions.

When a charge is made against your account that would take it to a negative balance, there are three potential outcomes.

First, your bank may foot the bill on your behalf and charge you an overdraft fee. This happens when you have “overdraft coverage.” You have to opt in to overdraft coverage for ATM and debit card transactions, but your bank may provide the coverage automatically on other transactions. Some banks will continue charging you for any additional transactions you make while the account is negative. These fees are often pretty steep and will add up quickly if you have to pay multiple times.

Second, funds from another account you own may be used to cover the charge. This happens if you have opted in to “overdraft protection.” If so, you will have linked another account to your checking account to serve as a backup. When the primary account reaches zero, funds from the other account are used (transferred) to cover the amount. You will usually pay a small fee for the transfer.

Ideally, your linked account would be a savings account or another checking account. You typically want to avoid using a credit card as your backup account, because it will likely be processed as a cash advance.

Third, if you do not have overdraft coverage or protection and your bank decides not to foot the bill, it will refuse the transaction. When it is declines the charge, the reason is called Nonsufficient Funds (NSF) or “insufficient funds.” You will owe an “NSF fee” in most cases, and often this fee is the same amount that the bank charges for an overdraft fee.

What to Do

If you have overdrawn your account or have insufficient funds, here are steps to consider taking.

Transfer Money

If you have funds to cover the expense, or just to add cushion to your account, you might make a transfer. A quick transfer can help prevent multiple overdrafts in a short time period. It can also allow you to reinitiate a charge from a merchant that previously failed due to insufficient funds.

Ask for Waived Fees

If you’re charged an overdraft or NSF fee, contact your bank and ask them to waive it. It can never hurt to ask, and if you have not had this problem before, the bank may be willing to waive the fee as a one-time courtesy.

Pay Your Fees

Alternatively, if you can’t get rid of the fee then be sure to pay it. Failure to pay an overdraft fee could lead to a number of negative consequences. The bank could close your account, take collection or other legal action against you, and even report your failure to pay, which may make it difficult to open checking accounts in the future. Note: typically, your bank won’t close your account right away after an overdraft, so you have some time to sort this out. But, try to pay the fee as quickly as you can.

Pay Third Parties and Avoid Legal Problems

If a merchant or other third party tried to make a charge against your account, either from a check you wrote or an ACH, and didn’t get paid, that’s a problem. This would occur in the “NSF” scenario mentioned above. In that case, not only do you need to settle up with the bank to pay the NSF fee, but you also need to settle up with the third party. You owe them money and could face adverse consequences if you do not pay them. It is usually best to resolve this as quickly and amicably as possible. Simply contact the merchant, explain the mistake, and submit the necessary payment.

How to Avoid this in the Future

There are a few basic strategies and habits you can use to keep your checking account at a positive balance moving forward. Here are a few:

Sign up to receive text or email alerts when your balance is low.
Check your bank account regularly and review your statements each month.
Review the dates that automatic payments are withdrawn compared to the dates you are paid. Make adjustments to automatic withdrawal dates if necessary.
Revisit your budget to make sure spending categories are not consistently exceeding what you can afford.
Build an emergency fund.
Consider whether overdraft protection and coverage makes sense for you. If they do, ensure that your backup account has a sufficient cushion.

Moving Forward

Having your bank account go to a negative balance is certainly not an ideal situation, but it is also not the end of the world. If this happens to you, be sure to resolve it as quickly as possible and then make a plan to keep it from happening again.

Our credit counselors can help you make a budget and financial game plan to help you meet all of your financial obligations. You can get started today with a free counseling session.

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How to Prepare Financially for When Your $600 of Federal Pandemic Unemployment Compensation Ends

July 30, 2020CreditBy toptierfinancial

If you have been receiving an extra $600 in weekly unemployment benefits—through the Federal Pandemic Unemployment Compensation (FPUC) program, you should know that those benefits are set to expire very soon. That money may have been helping you hold together your budget during these uncertain times, and having it stop suddenly may pose financial challenges. Here are some tips on how to prepare for this upcoming change.

Background

As a quick refresher, the FPUC program was created by the CARES Act. It provides $600 per week in federal unemployment benefits in addition to unemployment benefits that come directly from your state. According to the CARES Act, the program runs from April 5 to July 31. However, the real “end” date for the program is based on how your state runs its calendar for processing benefits. In most states, the FPUC program—and thus the $600 weekly payment—ends July 25 or 26.

Note: The FPUC program is one part of the broader “Pandemic Unemployment Assistance” (PUA). PUA has another component called the Pandemic Unemployment Emergency Compensation (PUEC), which provides an additional 13 weeks of unemployment benefits beyond what your state provides. The PUEC program remains in effect until December 31, 2020.

Planning for the Change

Since the income under the FPUC program is coming to an end very soon, here are some steps you can take to prepare.

#1 Stay Informed

You may have seen recent media coverage about the “next stimulus bill,” and you may have heard significant speculation about what it will include. Of course, any speculation is just a guess at this point, but you will want to be aware of any new changes that take effect. It is possible that the FPUC program could be extended or that a similar program could be created. There has also been discussion of bonuses for going back to work, which could affect your job searching strategy. You do not necessarily have to worry about every detail being discussed in Congress, but you will want to know the ins and outs of any new law that takes effect, since it will likely impact you directly.

#2 Save Up Now

Even though the end of the FPUC program is right around the corner, choices you make now could pay dividends for weeks, if not months, into the future. Set aside as much extra money from your final FPUC payments as possible. Padding your savings account may provide some much-needed reserves later.

#3 Keep Looking for Work

If you have been actively searching for employment opportunities, keep up the efforts. It can be difficult and disheartening to go through an extended period of unemployment, but your big break may be just around the corner. You might want to consider other sectors and industries. CNN put together a list of companies that are hiring during the pandemic. Given the nature of COVID-19, there can be an understandable degree of hesitation about working environments and an increased risk of exposure to COVID-19. Thankfully, many employers have created protocols to protect workers, but you will have to assess your level of comfort for each opportunity you consider. Also, remember that a back-to-work bonus could be part of a future stimulus bill.

#4 Cut Expenses

This sounds a bit cliché, but it is true regardless—when money is tight you will need to cut expenses as much as possible, in addition to attempting to increase your income. We have written about some cost-saving ideas during COVID-19, and now is a good time to implement those strategies if you haven’t already.

#5 Ask for Help

If the change in income puts you in financial bind, consider asking for help to get you through the transition period. This could take many different forms such as negotiating with your landlord to delay rent, receiving assistance from family members, or tapping into community resources to help you meet your basic needs. If you’re juggling credit card debt along with everything else, then credit counseling also may be able to help.

Change is around the corner, and the end of the $600 benefit may create a challenging transition period for you. Stay informed, keep making every effort to stretch your budget, and know that the NFCC is here to help should you need it.

 

 

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10 Smart Ways to Reduce Expenses and Tighten your Budget to Make your Stimulus Check Last

May 2, 2020CreditBy toptierfinancial

Have you received your economic impact payment, also known as a stimulus check? If so, you are probably thinking about the best way to use it. People who have been severely affected by COVID-19 will likely need to use it right away. The funds could cover food, housing payments, and other emergency expenses. On the other hand, those who have not felt an impact may invest or donate the funds. But many people are in the middle. They have felt the financial pinch from COVID-19, but are not in dire straits. For this group, the funds can serve as an important backstop, cushioning their savings and providing a reserve to dip into in the coming weeks and months. If that sounds like you, here are 10 tips for how to make that money last as long as possible.

Shift Your Mentality

First of all, you will want to maintain the right perspective. Even as the pandemic eases in the coming months, remember that the Unites States economy is in uncharted territory. Prepare for the unexpected, and think of your budget as being an emergency budget. Even if the situation gets better and the economy holds steady, there is nothing wrong with being over-prepared, and you will be thankful that you took precautions either way.

Have a Starting Point

Make sure you have a written budget. This monthly expense planning tool can help you get started. You will want to think about how much of your monthly income is going toward each major spending category. For example, experts usually recommend that no more than 25 percent of your budget goes toward housing, and that food and utilities not count for more than an additional 25 percent. You might even try the simple 50/30/20 approach. Whatever you pick, try to make a plan that is even more conservative than the recommendations. If you have already been budgeting then look at how much you have been spending in each category, and try to reduce the amounts significantly.  For example, if fifteen percent of your monthly income has been going toward food, you might try to bring that down to ten percent or less.

Avoid or Minimize Meals Out

Speaking of food, it is a large portion of everyone’s budget. However, it is also one of the easiest expenses to cut back. Eating out costs significantly more than making meals at home. Yes, eating out can be a way to contribute to the small businesses in your community. But if you are trying to keep your own finances afloat, you shouldn’t overdo it. Try to limit how much you spend at restaurants.

Clean out Your Pantry

Going to the grocery store is a challenging process during the COVID-19 era, and the expenses add up. But you may have a freezer or pantry full of food. This could be the perfect time to use that food strategically instead of buying more. Maybe there are a few ingredients you need to pick up every few weeks (like milk). But try to stay home and prepare the food you already have. You can even make this a fun challenge to see how close you can come to emptying your pantry entirely.

Cut other Grocery Luxuries

While you are limiting trips to the grocery store, try to eliminate any luxury items. This might mean skipping the name brand items and only buying generic products, giving up certain cuts of meat, and taking a break from alcohol. These can be some of the most expensive items on your grocery list, and cutting them for a while will make a noticeable difference.

Reduce Utilities

Utilities are another huge expense. Heading into May, we are almost to the time of year that many people run their air conditioning all day long. Try to avoid this to save on your electric bill. Open windows, wear lighter clothing, or run fans. Taking these measures might be a little less comfortable, but could reduce your bill.

Also, now is a good time to reassess your home Internet and television subscriptions. If you subscribe to multiple streaming services, consider reducing it to one.  You might also reduce your Internet package by selecting a slower connection speed. These changes will add up and save you a good chunk of change.

Cut back on entertainment

COVID-19 brought many forms of entertainment to a halt. No more trips to theaters, or concerts, or skating rinks, and so forth. However, it is still easy to get caught up in entertainment expenses at home. You might want to order new video games, or pay to stream a newly released movie. You may want to purchase items on Amazon to entertain yourself or your kids. Instead, try focusing on the things you already have. What do you already own or already pay for that can provide entertainment for free?

Here’s one simple list for free family entertainment ideas at home.

Cut Personal Spending

Like with entertainment, a lot of personal spending has already been cut, given that salons and similar businesses have been closed in most locations. Many of us aren’t used to going this long without a haircut, and have experimented with different forms of quarantine hair. Even once restrictions are lifted, you don’t have to rush back to the barbershop, nail salon, masseuse, or similar service. Instead, experiment with what you can do at home. See what new habits and methods you can find for self-care that are affordable and easy to do. Reducing these monthly, or even weekly, expenses can create huge savings moving forward.

Consider Stopping or Reducing your Giving

Donating money is a very personal decision. It is also incredibly important in times such as these, when many businesses and individuals are struggling financially and physically. Many nonprofit organizations are on the frontlines of helping people recover. If you can continue your normal level of giving, that is wonderful. Or if you can make a one-time gift to a charity, that is also fantastic.

In fact, thanks to the CARES Act you’ll receive up to a $300 tax deduction for cash donations to charity if you take the standard deduction. But, be honest with yourself about your situation. Consider if money is too tight to give right now. If so, you might reevaluate later in the year and make a gift then instead, once you know you can do so without jeopardizing your own financial health.

Manage Monthly Debt Payments and Interest

If a significant portion of your monthly income goes toward debt payments, you might want to reduce them. Or, you may be able to delay them, especially for student loans or mortgage payments. For credit card debt, it might make sense to reduce the payments along with the interest and fees. This could potentially free up more money for the rest of your budget, and give you more cushion each month. One great way do this is through a Debt Management Program.

Moving Forward

These tips should help you tighten your budget and stretch your income quite a bit further. Even if you just implement some of them, you should feel the difference at the end of the month, and your stimulus funds should last a little longer. Remember that the total impact of the COVID-19 pandemic and its effects on the economy are still uncertain. So, try to create lasting habits and changes to your budget that you can use not just in the weeks to come, but in the months and years to come.

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Three Conversations You Should Have Right Now Regarding Coronavirus and Your Finances

March 18, 2020CreditBy toptierfinancial

The rapid spread of the latest coronavirus, COVID-19 has already impacted the financial lives of millions of American households and shows no signs of diminishing any time soon. Where does this leave you and your family in terms of your financial preparedness for the potential economic downturn? Have you reviewed your ability to manage on reduced work hours or to survive a layoff? What does that mean in terms of your current financial obligations like rent, mortgage, auto loan, credit cards and utilities? Successfully managing your available resources requires open lines of communication with everyone who has a stake in your financial health.

Here are three conversations you should have right now in order to minimize the financial impact of the COVID-19 crisis.

Your Family

Open and frequent communication about finances can help make a crisis much easier to manage among family members. Even if you are the only one in your household, it is important to review your savings and fine tune your budget based on your current needs and future goals. Your personal savings will play an important role in an emergency but having an emergency spending plan will help you make that savings go farther. Work with everyone in your household to determine what is necessary and what expenses can be cut. Discuss which alternative budgets will work best and consider going off script to develop the best plan for your unique circumstances. For example, the popular 50/30/20 rule may work well during normal times, but the 30% recommended for entertainment and other discretionary expenses would not be appropriate during a time of belt-tightening.

Your Employer

The prospect of having work hours cut or eliminated can add a tremendous amount of stress to an already unsettling situation. Job stress resulting from these unknowns can have a detrimental impact on how you manage through difficult times. Make sure you understand what options are available for the continuation of employment and any income adjustments that may result from staffing changes. Knowing those details can help you anticipate when you will need to implement changes to your household budget. The discussion should also cover your benefits and their status if employment is terminated or hours are cut. When possible, make use of your Employee Assistance Plan (EAP) to receive counseling and access to other support services that can help you manage during times of economic disruption. Also keep in mind that there are some industries hiring to meet additional demand as more people adapt and shelter in place. If loss of income seems imminent, explore ways to generate a supplemental income stream with an employer or in the gig economy.

Your Lenders and Utilities

Being proactive can make a big difference when dealing with all sorts of financial obligations ahead of a crisis. There are already lenders and service providers offering special assistance for people with questions about managing bills during the coronavirus pandemic. It is likely that there will be an increasing level of guidance as the virus continues to impact more communities. When you are certain that your wages will be reduced or eliminated, contact each of your financial obligations to make them aware of the situation. Be honest and as detailed as possible about how the change will impact your ability to pay your account. Even if they offer special recommendations in response, always ask if there are other options for you to consider. The more informed you are about your choices, the more likely you will find the most appropriate solution. Sometimes these discussions can be overwhelming, and you are provided a lot of information to process. It is reasonable to ask for some time to consider your options and review the information, and you should also request to have details provided in writing by text or email.

There is no shame in reaching out for help in a time of need, so don’t hesitate to contact a nonprofit credit counseling agency for guidance when you feel confused or overwhelmed. Trusted agencies like those affiliated with the National Foundation for Credit Counseling (NFCC) have been helping people overcome financial challenges since 1951 and are here to help you no matter your circumstances.

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#AskanExpert: How do I start rebuilding my credit after an unexpected pregnancy?

November 24, 2019CreditBy toptierfinancial

Q. I started trying to improve my credit a few years ago with credit cards but my job and an unexpected pregnancy led to nonpayment and defaulting on all of those accounts. How do I start rebuilding my credit? 

Dear Reader,

The general strategy to rebuild your credit should include repaying your debts and getting a secured credit card to start developing new credit. This road is not always straight forward because your strategy will depend on your debts and your current financial situation. I suggest you start by determining how much you owe and to whom. You can get these details reviewing your credit reports (free at www.annualcredit.com) or contacting your creditors. Then, create a budget to determine how much income you’ll have to allocate toward a repayment plan.

While you are repaying your debts, you can apply for a secured credit card. These cards work like regular credit cards. The main difference is that you are required to make a security deposit when you open the account. Many banks offer these cards and have different features. Review them carefully, just make sure they report to the credit bureaus and that you understand any associated fees, if any. Once you have your secured credit card, use it strategically—make full, on time monthly payments and only use 30% of your available credit or less.

During the rebuilding process, sometimes it is hard to know what to do first. If you think you need extra help, contact an NFCC-certified credit counselor. A nonprofit counselor can provide the guidance you need so that you can focus on what’s really important– like becoming a mom. Help is nearby. Good luck!

Sincerely, 

Bruce McClary, Vice President of Communications

Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.

 

 

 

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How to Avoid Overdraft Fees

August 29, 2019CreditBy toptierfinancial

Since 2010, financial institutions are required to get your permission for overdraft protection, a service that you would opt in to receive.  If you’ve opted in, you will be charged overdraft fees if you exceed your account balance.

Many banks and credit unions offer overdraft programs, and these can vary by institution.

It might seem like overdraft fees are a problem of the past: in the old days, people mostly wrote paper checks that would take some time to clear, and if money got withdrawn in the meantime, there would be insufficient funds for the check, triggering an overdraft fee.

Now, with the new laws regarding overdraft fees, the speed with which banks process payments, and the spread of electronic payments instead of paper checks, it would seem that overdrafts would be less common.

It’s not true, though. There are more reasons than ever for overdrafts to happen. People have more online subscriptions than ever. They use online bill pay, where the money is scheduled to come out of their account at a later date. And some people still write old-fashioned paper checks. On top of that, some purchases won’t go through as fast as we expect. If you order something online and it’s not in stock, the merchant might process your payment days or weeks later when the item becomes available again. That timing might not be good for your budget, and trigger overdraft fees when the delayed purchase goes through.

How to avoid overdraft fees

The first thing to do is opt out of overdraft protection. This is the default setting for bank accounts by law, but if you’ve opted in to overdraft protection, you need to change that. If you’re not opted in, then one-time transactions will be declined if there aren’t sufficient funds, so you won’t be charged overdraft fees.

Yes, it’s inconvenient and potentially embarrassing to be told at the register that your transaction was declined, but overdraft fees can severely hurt your finances—that $5 latte can become a $40 cup of coffee when overdraft fees are applied.

Notice we said one-time transactions are declined. Banks may still process your payment if you have recurring automatic deductions, online bill pay, or other regular payments deducted from your account. This means you will still have plenty of opportunities to trigger overdraft fees even if you haven’t opted in.

Use your bank’s bill pay. It’s better to set up bill pay from your bank’s side, rather than direct debit—with the latter, you authorize your biller to withdraw the funds required straight from your account. It’s convenient for you, but puts you at greater risk of overdrafts, since you aren’t involved in the bill payment process. By using your bank’s online bill pay instead, you still have to log in and authorize the payments, so you know how much money is available and there are no surprises.
Beware of temporary holds. If you buy gas at the pump, your debit card will typically be charged a pre-set amount that might be greater than the real purchase. You might only want to get $10 worth of gas, but a gas station might put a hold on your funds that could be 10 times that amount. We’ve seen reports of gas station holds of $125 or more, just to make sure you have enough funds to pay for your fill-up. Tip: One way to prevent this is to avoid using debit at a gas pump, and go directly into the store and prepay for the exact amount of gas that you want. Eventually, that money is released back into your account, but while it’s being held, you could have much less available than you think, putting you at risk of overdrafts. Another place temporary holds are common is at restaurants, where a default amount is added for a tip, and then the real tip you authorize is calculated later. If the default hold is higher than the actual tip, you risk coming up short.
Use your financial institution’s app. Keep track of your balance all the time. Use your bank’s web site or app so you always have a quick way to check your balance. While you’re at it, sign up for alerts, so you’ll get a text message if your balance drops below a certain amount. Many people don’t like to think about their bank balances, especially when they get too low, but it’s critical to your budget and financial well-being to be aware of what’s in the bank at all times. This will also help you spot things like fraudulent charges quickly so you can get them resolved before they do too much damage.
Link your savings account to your checking so that if you are overdrawn, money is automatically transferred from one account to the other. This might not be free, but a transfer of this nature will be much less than an overdraft fee. Think $10 for the transfer vs. a $35 overdraft fee.
Use prepaid cards. If you continue to have problems with overdrafts on your account, you could set up a prepaid card, so that there’s no way you can spend more than is available.
Get budgeting/debt counseling. Any NFCC-member credit counselor can help you create a budget you can live with. If you have a lot of credit card debt, they can set up a debt management program or self-administered plan that will teach you to live on a cash basis while paying off that debt. This budgeting help is worth seeking out if you’re in any danger of overdraft fees.

 

Melinda Opperman is Senior Vice President of Community Outreach & Industry Relations, Springboard Nonprofit Consumer Credit Management, Inc; and Executive Director, Springboard Education Foundation. Springboard Nonprofit Consumer Credit Management is a member of the National Foundation for Credit Counseling.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

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