Banks charge overdraft fees when you don't have the necessary funds to cover a purchase that you've made with a debit card or check. Instead of declining a charge, your bank will make the payment and hit you with a fee. Not only will you owe the money you spent that you didn't have funds for -- but you also could be dinged with another $30 to $35, putting you deeper in the hole.
Alternatively, banks may refuse the payment and serve you with a non-sufficient funds fee, meaning you can't complete your purchase and you owe additional money for not being able to pay.
While some banks are Consumer Financial Protection Bureau shows that banks earned a whopping $15.47 billion from overdraft fees in 2019., they're still a major penalty for consumers. Research from the
If your bank or credit union still charges overdraft fees, you can take some simple steps to protect yourself. Read on to learn more about how overdraft fees work and how to avoid them.
What is an overdraft fee?
An overdraft fee is a bank fee you incur when you spend more money than you have available in your checking account.
For example, if you have $20 in your checking account and buy a $30 item, your bank will clear the transaction -- but charge you an overdraft fee. Your bank will take the remaining $10 that's owed plus the overdraft fee when you make your next deposit.
Overdraft fees can quickly add up – If you don't realize that your checking account balance is low or zero, you could be nailed with a fee for every purchase you make that's beyond your available funds. According to the CFPB, about 9% of consumers account for roughly 80% of all overdraft and non-sufficient funds fees.
A 2021 Morning Consult survey found that more than half of respondents reported overdrafting in the past, with nearly 40% saying they'd done so in the past year.
How much do overdraft fees cost?
Overdraft fees will vary by financial institution, but typically you're looking at $30 per overdrawn transaction, according to the Federal Deposit Insurance Corporation. According to a Bankrate study, overdraft fees currently cost $33.58 on average. And the fee is fixed regardless of the transaction amount -- you're charged the same whether you overdraw $1 or $100.
As overdraft fees come more and more under fire, some banks have recently decided to end the practice, like announced it is slashing fees from $35 to $10 starting in May.and . Other banks have simply cut back on the fee amount, like Bank of America which
How to avoid overdraft fees.
1. Opt out. Your bank or credit union can't charge overdraft fees unless you've agreed to them, according to the CFPB. Once you opt out, transactions that exceed your available balance will be declined. If you write a check and it bounces -- meaning a merchant returns the check to your bank due to insufficient funds -- your bank may hit you with a non-sufficient funds fee. It's essentially the same fee -- exacted when you don't have enough money to cover a transaction -- called by a different name.
2. Link your savings account with your checking account. When you link accounts, any amount not covered by your checking account will automatically be covered by your savings account. Assuming you have money in savings, this is a far less costly option.
3. Link your checking account to a line of credit. Contact your financial institution to see if you can connect your checking account to a credit card. You may still have to pay a fee and interest -- but it's usually cheaper than paying the overdraft fee, according to the CFPB.
4. Sign up for low-balance alerts. Your bank may offer low-balance alerts through email or text message. These alerts will notify you when your balance falls below a certain threshold, which you can dictate.
5. Open a checking account without overdraft fees. Some banks offer Capital One, Ally, Discover, , Axos and all offer accounts with no overdraft fees. Moreover, some banks are starting to limit the fee amount, like Bank of America, which will cut its fee from $35 to $10 starting in May.that don't charge overdraft fees and other banks have eliminated them.
A political solution?
Overdraft fees can pile up quickly, and they're costing Americans billions of dollars every year. Critical calls are ringing in from legislators -- both the US House of Representatives and US Senate proposed bills last year to limit overdraft fees in order to protect consumers. Those bills haven't moved beyond the initial introduction phase yet, and so, for the time being, overdraft fees continue to hang over us.
The editorial content on this page is based solely on objective, independent assessments by our writers and is not influenced by advertising or partnerships. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.