What Are Overdraft Fees?

An overdraft fee is a charge by your banking institution when your checking account doesn’t have enough funds to cover a pending transaction, withdrawal or electronic transfer. The bank’s overdraft protection covers the shortfall and charges an overdraft fee to your account. 

The bank fees for this convenience are expensive, about $35 on average. In fact, the overdraft fees are often more than the purchase. A Consumer Financial Protection Bureau (CFPB) study revealed the median purchase amount that leads to an overdraft fee is only $24. That means the average overdraft fee is 68% more than the average purchase that triggers the fee.

These fees can add up so it’s important to understand what they are, how they work, and most importantly, how you can avoid them.

Why Do I Get Overdraft Fees?

When you make a transaction that brings your account balance below zero, it is considered overdrawn and the bank charges you with an overdraft fee because they have to cover the balance. As mentioned above, the average overdraft fee is $35, although some institutions, particularly online banks, do not charge overdraft fees at all. 

Not all overdrafts result in overdraft fees. For example, your bank or credit union might not apply a fee when you make automatic payments or pay with a check. Take caution though as some banking institutions may return these payments or checks as unpaid. 

As you might imagine, banks usually impose a fee for unpaid transactions, which is called a nonsufficient funds fee (NSF). An NSF fee is typically about the same amount as an overdraft fee. 

Bring your account balance to zero as soon as you can because the bank charges interest on the overdraft amount which can run upwards of 20% with some banks. It may seem like a double penalty to charge interest on top of a fee, but the banks justify the interest by defining an overdraft as a short-term loan. 

It’s important to manage your expenses carefully to avoid overdraft fees as they can be very costly. According to the CFPB, overdraft and NSF fees account for the largest banking expense for anyone with a checking account. These fees cost Americans $17 billion each year. 

How to Avoid Overdraft Fees

Here are seven ways to avoid overdraft fees:

1. Always Buffer Your Checking Account

By cushioning your account with a little extra money, you can cover unexpected expenses and potential overdraft fees.

2. Check Your Bank Accounts Regularly

Review your accounts several times each week to verify you have enough in your account to cover any pending transactions. 

3. Create Balance Alerts

If you don’t want to spend your time checking your account balance multiple times a week, consider automating the process. Many banks enable you to create email and mobile text alerts that notify you when your account balance is below a specific amount that you determine. 

4. Quickly Cover the Overdraft

If you know a purchase has just brought your account balance below zero, you may be able to make a same-day deposit to cover the amount and prevent an overdraft fee. Ask your bank if they have a cut-off time for deposits to be credited to your account. 

Another reason to quickly pay the overdraft amount is to avoid extended overdraft fees, which you can incur by carrying a negative balance for several days. 

5. Link to a Savings Account or Brokerage Account

See if your bank offers an overdraft protection transfer service that links your checking account with your savings or checking account at the same bank. When a transaction can’t be covered by the amount in your checking account, the bank will transfer money from your linked account to cover the difference. Typically, banks and credit unions charge a transfer fee for this convenience, but it is normally less than an overdraft fee. 

6. Opt-Out of Overdraft Protection

When you opt-out of your bank’s overdraft coverage program, your bank will simply decline any transaction that exceeds your account balance. However, the bank may still charge an NSF fee that is usually about the same amount as an overdraft fee. In fact, it could cost you more if the recipient of the declined payment adds on their own fee. 

If you’re going to opt-out of overdraft protection, there’s one way to do it and save money: opt-out of protection only for debit card payments and ATM withdrawals. The downside is the embarrassment when a business declines your debit card transaction, but that’s financially better than getting hit with overdraft fees. 

7. Consider a Credit Union or Online Banking

Check your area to see if any credit unions do not charge overdraft fees. Also, consider signing up with an online bank as many offer low or even $0 fees. 

For example, Fidelity Investments offers banking with free overdraft protection while Chime offers its members no-cost protection up to a maximum of $100. 

How to Get Overdraft Fees Waived

In a Credit.com study of 1000 people, 35% of the respondents were able to get their overdraft fees waived by simply issuing a complaint to their bank or credit union. Here’s how to effectively complain to get a fee forgiven:

Experts recommend addressing an overdraft fee right away for the best chance of having it waived. Speaking to your bank over the phone is the most convenient. You might also consider visiting your bank in person because the bank manager will not want any conflict in the branch where other customers can hear. 

Customer loyalty goes a long way. If you’ve been an account holder for several years, mention it to a customer support representative. If the support agent is unable to help you, don’t be afraid to go up the management chain and speak with those with the authority to waive your fee. 

The Bottom Line

Overdraft protection covers your transactions when they result in a negative account balance, but overdraft fees can quickly add up if you’re not careful. The best practice is to avoid overdraft fees altogether by being mindful of your balance and never spending more than you have available.

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