Bank Overdraft Fees: How They Work and How to Avoid Them
What is an overdraft fee?
An overdraft fee is a penalty banks levy when a payment by debit card or check exceeds the account holder’s available balance checking account. Instead of declining a fee, your bank takes care of the payment and charges a fee.
If you overdraw, you owe the money for the original purchase plus the overdraft fee.
Example overdraft fee
A penalty fee will be charged each time payments exceed the available balance in your account. For example, if you have $20 in your checking account and buy an item for $30, your bank will clear the transaction. However, the bank will charge you an overdraft fee. Your bank will collect the remaining $10 owed plus the overdraft fee when you make your next deposit.
Your bank may offer overdraft protection. In this case, purchases that exceed your account balance will still be paid by the bank. However, your account may remain in the red until your next deposit.
How much are overdraft fees?
Overdraft fees vary by financial institution. According to a Bankrate study, the average overdraft fee is $29.80. And the fee is fixed regardless of the transaction amount – you’ll be charged the same fee whether you overdraw $1 or $100.
Some banks, like Capital One and Citibank, recently decided to stop charging overdraft fees. Other banks have simply cut fees, like Bank of America, which recently cut fees from $35 to $10.
While some banks are reducing or even eliminating overdraft fees, they’re still a major penalty for consumers. Research by the Consumer Financial Protection Bureau found that banks made $15.47 billion in overdraft fees in 2019. The five largest US banks charge overdraft fees.
Overdraft fees from the largest US banks
| Bank | overdraft fee |
|---|---|
|
Chase Bank |
$34 |
|
Bank of America |
$10 |
|
Wells Fargo |
$35 |
|
citibank |
$0 |
|
US bank |
$36 |
How to avoid overdraft fees
1. Reject
According to the CFPB, your bank or credit union cannot charge overdraft fees unless you have consented to them. Once you opt out, transactions that exceed your available balance will be declined. If you write a check and it’s undeliverable — which means a merchant sends the check back to your bank for insufficient funds — your bank may charge you an insufficient funds fee. It’s essentially the same fee – charged when you don’t have enough funds to cover a transaction – that goes by a different name.
2. Link your savings account to your checking account
When you link accounts, any amount not covered by your checking account will automatically be covered by yours saving account. Assuming you have money saved, this is a far cheaper option.
3. Link your checking account to a line of credit
Contact your financial institution to see if you can link your checking account to a credit card. You may still have to pay a fee and interest – but according to the CFPB, this is usually cheaper than paying the overdraft fee.
4. Sign up for low balance notifications
Your bank may offer low balance alerts via email or SMS. These alerts notify you when your balance falls below a certain threshold that you can dictate.
5. Open a checking account with no overdraft fees
Some banks offer verify accounts which do not charge overdraft fees and other banks have eliminated them. Capital One, Ally, Discover, Chime, Axos, and Aspiration all offer accounts with no overdraft fees. Additionally, some banks are beginning to cap fee levels, such as Bank of America, which will cut its fee from $35 to $10 starting in May.