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Understanding and Avoiding Overdraft Fees

How Do Overdraft Fees Work?

An overdraft fee occurs when you spend more money than you have in your checking account, but your bank or credit union authorizes the transaction and charges you for that service. Not all banks charge overdraft fees, and those that do have varying fees. Understanding your bank’s overdraft policies can help you avoid these potentially costly fees.

How Overdrafts Happen

Overdrafts occur when you spend more than your available balance. This can happen through ATM withdrawals, checks, debit card payments, ACH transactions, automatic payments, or cash withdrawals. If your account lacks sufficient funds, the bank may either decline the transaction or cover it and charge an overdraft fee.

Example of an Overdraft

Imagine you have $100 in your account and make a $125 purchase with your debit card. Your bank might authorize the transaction, cover the $25 shortfall, and charge you a $35 overdraft fee. You now owe the bank $60.

Types of Transactions

Banks usually authorize ACH or check overdrafts and charge a fee to ensure your bills are paid on time. However, they may decline ATM or check transactions if your account can’t cover them. For debit card and ATM transactions, banks typically can’t charge overdraft fees unless you opt into their overdraft protection program.

How Much Do Overdraft Fees Cost?

Overdraft fees can range from $15 to $37, with many banks charging over $30. The exact fee depends on your bank’s policies. Some banks may charge multiple overdraft fees in a single day if several transactions are authorized without sufficient funds.

Overdraft Fees at Major Banks

• Bank of America: $0 – $10 depending on account type
• Capital One: No overdraft fees
• Chase: $34
• Citi: No overdraft fees
• Discover: $0 (payments are declined if there isn’t enough money in the account)
• U.S. Bank: $36 (no fee for overdrafts of $5 or less or if your account is overdrawn by $50 or less)
• Wells Fargo: $35

How to Avoid Overdraft Fees

Here are some tips to help you avoid overdraft fees:

Choose an Account with No Overdraft Fees

Many banks have stopped charging overdraft fees. If your bank’s fees are high, consider switching to a bank with no overdraft fees.

Opt Out of Overdraft Coverage

Opting out of overdraft coverage means your ATM and debit card transactions will be declined if you don’t have enough money, but it can save you from accumulating fees.

Link Accounts for Overdraft Protection

Some banks offer overdraft protection by linking your checking account to another account. This way, funds can be transferred to cover transactions without incurring overdraft fees.

Monitor Your Account Balance

Regularly check your account balance to ensure you have enough funds to cover transactions, especially if you have pending autopayments.

Set Up Account Alerts

Use your bank’s website or mobile app to set up alerts for low balances or large transactions. This can help you avoid overdrafts by notifying you when your balance is low.

Request a Fee Refund

If you incur an overdraft fee, contact your bank to request a refund. Longtime customers with a good history may have better luck getting fees waived.

Repay Overdrafts Quickly

Some banks won’t charge overdraft fees if you bring your account balance above $0 within a grace period, usually by the next day.

Maintain a Cash Cushion

Keeping extra money in your checking account can help prevent overdrafts. Budget your monthly expenses and keep an additional amount in your account to cover unforeseen charges.

The Bottom Line

While many banks are reducing or eliminating overdraft fees, they can still add up if your account frequently drops below $0. Frequent overdrafts may indicate that you’re not living within your means and could affect your credit score if unpaid fees are sent to collections. Setting a budget and monitoring your account balance can help you avoid overdrafts and achieve your financial goals.

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