You check your bank account and find not only have you overcharged your account — you also have a charge for $35. Your first thought is that someone has stolen your debit card or your account info. But a closer look reveals that the bank withdrew this money from your account. Even though you may think this was a mistake, it wasn’t — it’s what’s called an overdraft fee.
Whether you’ve been in this exact situation or something similar, incurring overdraft fees when you overcharge your account can be a frustrating experience. These fees relegate your bank account to the negatives and take away your hard-earned money — $30-$35 at a time.
Before we discuss ways to avoid an overdraft fee, let’s take a look at what they are and why they exist.
What Is An Overdraft Fee?
Simply put, an overdraft fee is a fee that your bank charges when you spend more than you have available in your checking account.
For example, if you have $25 in your checking account, go to the grocery store, and swipe your debit card to buy $30 in food, it’s up to the bank to decide whether to allow the transaction.
One of two things can happen:
- The bank can decline the transaction, and you can’t make a purchase.
- The bank can allow the transaction, relegating your balance to -$5 (in this situation) and charging you an overdraft fee.
Let’s dive deeper into the second scenario. If your overdraft fee was $35, that means that after the purchase, your account will read -$40. This means that you’ll have to pay $40 simply to get back to a zero balance, and you’re paying an extra $10 for groceries — and getting nothing for it — because of the overdraft.
Unless you have overdraft protection — which we’ll discuss in this article — the bank doesn’t like making what is effectively an unexpected loan, so they discourage overdrafts by charging fees.
These fees make overdrafts one of the most expensive forms of credit that you can get.
How Much Overdraft Fees Can Cost
Because overdraft fees are set by each bank, there is no one standardized fee. These are the overdraft fees charged by five of the largest banks in the United States:
- Chase - $34, limit of $102 per day
- Bank of America - $35, limit of $140 per day
- Citibank - $34, limit of $136 per day
- Wells Fargo - $35, limit of $105 per day
- HSBC - $35, limit of $105 per day
It’s easy to see the significance of knowing how to avoid overdraft fees. All it takes is a few of them and suddenly, you’re paying over a hundred dollars to your bank for reasons that you can completely avoid.
6 Ways to Avoid Overdraft Fees
Here are five actionable ways to avoid overdraft fees and keep that money in your pocket.
Opt-Out Of Overdraft Protection From Your Bank
Just because your bank offers “overdraft services” — allowing you to make a purchase even if you don’t have the money in your account, though charging you an overdraft fee — doesn’t mean that you have to use it.
You have the right to tell your bank to not allow you to overdraft your account. In fact, we recommend you use this right.
This takes advantage of a 2009 regulation announced by the Federal Reserve that bans banks from charging overdraft fees on ATM and non-recurring debit card transactions unless the customer signed up for overdraft protection.
If you do choose to opt-out of overdraft protection, your card will decline at the point of purchase instead of receiving an overdraft fee.
While this will keep you free and clear from overdraft fees, it’s important to note that if you have a low balance, it could put you in a bind if you use your debit card to buy essentials, like food.
If you use your debit card to pay bills, such as your electric bill, and it declines, it could also result in late payments and fees (or even the power shutting off) from the company that is sending the bills.
Sign Up for Overdraft Protection Transfers
If you have a savings account linked to your checking account, many banks offer what’s called overdraft transfers. Here’s how it works: if you sign up for this service, the bank will automatically move money from your savings account to your checking account to prevent overdrafts.
This strategy is only works, though, if you have money to spare in your savings account. If your savings account is also low on funds, you’ll end up incurring an overdraft fee in your checking account.
While there is usually a fee for this service — which ranges from $10-$12.50 per transfer — it is much less than the fee charged for an overdraft.
Sign Up for Account Alerts
Many banks provide a feature that will send you an alert whenever your account balance reaches a specific low amount.
You can set an alert so you’ll get an e-mail or a text from our bank whenever your balance falls below $50, $100, or whatever minimum balance you choose.
When you receive an alert, you’ll know exactly how much money you have in your account which can help you gauge your future spending. After all, sometimes an overdraft fee is incurred simply because you lose sight of how much you have available.
Alerts will also notify you if someone steals your card information and uses it to make purchases.
Be Aware of Purchases That Place A Hold On Your Account
Sometimes, you have to swipe your debit card for a purchase before you know exactly how much you’ll be paying.
Think about filling your car up with gas. You swipe your card before you pump the gas and know the final total. To make sure that you have enough money to pay for the final transaction, the gas station places a hold on some of the money in your account when you swipe your card.
For example, the gas station could place a $50 hold, even if you only wind up buying $20 in gas. While the hold is in place, the money stays in your account but can’t be spent.
When you check your account balance, you’ll see that you have $100 in the account. If you fail to see that there’s a $50 hold, you might try and spend $75 only to get hit by an overdraft fee.
If you’re buying gas, staying at a hotel, renting a car, or taking part in some transaction that involves placing a hold on your funds, keep in mind how the hold will have an effect on your balance.
Track Your Spending
The best yet most simple way to avoid overdraft fees is to not spend more money than you have. While it sounds simple, it can be hard to put into practice. And the best way to do this is by tracking your spending. Don’t let your bank account and your charges go on autopilot.
In the event of an unexpected bill that relegates your account ot the double or single digits, utilize your emergency fund to avoid even the chance of overdraft fees. If you don’t have an emergency fund, you can find out how to save for one here.
Ask The Bank To Waive Overdraft Fees
Though not guaranteed, there are ways to get an overdraft fee waived.
Banks may waive an overdraft fee if:
- it’s the first time that you’ve overdrafted the account
- you’re a very irregular overdrafter
- you experience issues with customer service or other technical related tasks
When you’re on the phone with your bank, don’t be afraid to be persistent but polite.
If the representative says no the first time you ask, point out your history with the bank and that you’ve been a good customer and you’re free to take your business elsewhere.
It might also be worth hanging up and trying again with a different customer service representative the next day.
Above all, don’t be rude or pushy, just ask if there’s anything that the person on the line can do to help you out.
Sometimes, you’ll get lucky. Other times, you’ll just have to pay the fee and move on — but not let it happen again.
What Happens If You Don’t Pay An Overdraft Fee?
Once an overdraft fee is placed on your account — unless you can get it waived — it must be paid.
If not, you can incur other negative balance-related fees and eventually, the bank may shut down your account and ask creditors to seek repayment, undoubtedly dinging your credit score.
How to Avoid An Overdraft Fee
Now that you know what an overdraft fee is — and most importantly that overdraft fees are entirely avoidable — use any of the strategies mentioned in this article to ensure you never pay one again.