As if college isn't expensive enough — and at an average $24,610 for a year at an in-state public college and twice that at a private one — today's college students seem intent on adding substantially to their bills. The culprit? Overdraft and late payment fees. Over four years of school, those charges add another $1,016 for the average student, according to NerdWallet. In total, U.S. college students spend more than $795 million a year on overdraft and late payment fees. And every penny of that spending is unnecessary.
So, if you're sending a child off to school this fall here's what they need to know to keep the money in their bank accounts — where it belongs.
Skip Overdraft “Protection”
Overdraft protection can be a misnomer, says millennial money expert Stephanie O’Connell. Essentially, the "protection" is assurance that if you pay for something, your purchase will go through even if the money isn't there. But no one is protecting you from overdraft fees. The average bank overdraft fee is currently $35, at credit unions it's a somewhat more reasonable $27.76, according to to a Bankrate.com survey.
To make matters worse, some financial institutions reorder your day’s transactions from highest to lowest amount (rather than in the time order in which you make them), so that if you do overdraw, you may end up paying more than one fee (once for the high charge if it’s more than your balance, then once for each lower charge after that). This can really add up. “If you got charged three overdraft fees in one day, you’re paying $100,” says O’Connell. “What else would you want to do with $100?”
The fix: Don’t sign up for overdraft protection — and if you’ve already got it, call and opt out. “You could buy a $5 sandwich and wind up with a $35 fee for it,” says NerdWallet personal finance columnist Liz Weston. Opting out means that if you do try to buy something your balance doesn’t cover, your debit card will be declined — but a moment of embarrassment at checkout is likely worth the high-fee alternative. One key thing to remember: If you opt out of overdraft protection and have a credit card, it’s important to make certain you have enough in your checking account every month to pay the credit card bill. If you don’t, your payment will be declined, and a late or missed payment can result in higher fees, interest rates and a lasting impact on your credit score. More on that in a minute.
U.S. college students spend more than $795 million a year on overdraft and late payment fees. And every penny of that spending is unnecessary.
Alerts and Auto-Pay Are Your Friend
Visit your financial institution and credit card company websites, and in the settings sections, turn on as many alerts as you can — for low balances, transactions above X amount, purchases made by phone or online and reminders about payment due dates. It’s also a good idea to sign up for daily account balance reminders so you’re never in the dark about how much you have. The NerdWallet analysis we mentioned before studied overdraft fees and late fees, and those late payments can result in fees and a lower credit score over time. Worst of all, they can turn into skipped payments — which could knock 100 points or more off your credit score, taking up to three years to recover, says Weston.
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The fix: Set up automatic minimum payments from your checking account to your credit card as well as other bills (health club, car insurance, etc.) you pay on a regular basis. For those credit cards, set an amount you're sure will cover the minimum, then when your bill arrives use that as a nudge to go back and adjust the amount you owe. Each month before your payments are due, set a calendar reminder to check your balance to make sure you have enough to cover it.
Remember: It’s vital to try to pay your card off in full every single month, so don’t charge more than you can afford. Try to minimize the urge to charge by thinking about your long-term goals (a.k.a. spring break or that trip you want to take after graduation rather than today's lunch), says Benjamin Keys, assistant professor at The Wharton School. Getting into credit card debt during college, when you likely don't have much of an income, can mean incurring a mountain of interest. Ask yourself before every purchase: Do I need this? Do I really, really want it?
Students Aren't Given a Banking Break
Finally, when you make your choices about where to bank, keep overall costs — including account maintenance fees — to a minimum. There are plenty of free checking accounts available, Weston notes. Yet, she says, "colleges often steer [students] to options that might not be the best for them.” Step one to combat this? Be aware that just because something is marketed as a student checking account or a student credit card, that doesn’t necessarily make it the best product for your needs. “A trap people fall into is they take the first account they’re given without actually looking at what the fees are, what the fine print is. What are the terms and conditions?” O’Connell adds.
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The fix: Compare fees at the brick-and-mortar banks on campus. If you're not satisfied, consider an online financial institution, many of which don’t have fees or account minimums. Personal finance blog PT Money lists some of the best options here. The one thing to watch out for? ATM fees. Yes, you can Venmo your friends and swipe for just about everything else, but if you want to grab cash from a machine that doesn't belong to your bank it can cost $2 to $3 a pop. Be realistic about how often you'll do that and factor the likely monthly ATM fees into your decision.
Never assume anyone has your best interest at heart. Do your own research on checking accounts and credit cards, and don't be afraid to ask about fees and fine print. Set up alerts and reminders for all your accounts, and schedule automatic minimum payments for credit cards (but try your best to manually pay them off in full every month). Opt out of overdraft protection with your financial institution, but every month before your credit card payment rolls around, make sure your balance is enough to cover it.
With Hayden Field