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Banking 101: Overdraft Fees - What You Need to Know

Written by Anne Boulean | Published on 3/29/2019

Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.

If you’ve ever overdrawn your account, you’re probably familiar with the pain of being hit with a dreaded overdraft fee.

This happens when your bank account falls below zero, subjecting you to an overdraft fee. When your account is overdrawn, your financial institution will continue to pay for purchases you make, essentially acting as a line of credit.

Banks and credit unions charge overdraft fees for this service, which varies from institution to institution.

Overdraft fees: Explained

If your account has insufficient funds to pay for a purchase, your financial institution could cover these purchases for you — for a fee.

For example, if you have automatic payments set up for a bill that costs $150 a month but you only have $100 in your bank account, your bank may allow this charge to go through. This will leave your account at negative $50. As a result of overdrawing an account, banks and credit unions charge a fee, which can cost as much as $36 per purchase at major financial institutions. Some banks also have caps on how many transactions you can make per day while overdrawn, which means you may have purchase payments declined when overdrawn.

By law, bank and credit union accounts do not come packaged with overdraft fees. Instead, consumers have to opt in to these programs, as well as opt out. Also, if you already have a debit account linked to an overdraft fee program, you can change that, too, and decide to opt out of the overdraft fee programs if you wish.

What kind of fees are charged?

Each bank or credit union has its own set of overdraft fee policies. Here’s a chart to help you break down overdraft fees at some financial institutions.

Bank/Credit Union Overdraft Fee Maximum Fees Per Day Total Possible Daily Cost
Chase $34 3 $102
Bank of America $35 4 $140
Wells Fargo $35 3 $105
Citibank $34 4 $136
U.S. Bank $36 4 $144
PNC Bank $36 4 $144
TD Bank $35 5 $175
Capital One $35 4 $140
Navy Federal Credit Union $20 3 $60
BECU (Boeing Employees’ Credit Union) $25 5 $125
SchoolsFirst Federal Credit Union $22 3 $66
Golden 1 Credit Union $27.50 No limit (maximum amount of overdraft coverage is $500) No limit (maximum amount of overdraft coverage is $500)
America First Credit Union $25 No limit No limit
Security Service Federal Credit Union $32.50 No limit No limit

How to avoid overdraft fees

With the possibility of being charged hundreds of dollars or more per day due to a lack of funds, overdrawing an account can quickly become a costly mistake. But there are ways for you to avoid these fees, whether that’s through personal monitoring, opting out of overdraft coverage or changing the way you bank altogether. Here are a few ways you can avoid overdraft fees.

Keep track of your account balances

To keep your bank account above zero and eliminate the possibility of being charged high overdraft fees, begin by taking stock of your bank account. If you don’t already, check your accounts daily to keep a close eye on the balance. Check your budget to see whether you can afford certain purchases you were planning to make that day, or whether you should hold off until you receive your next paycheck.

It’s also ideal to keep a financial cushion in your account to prevent dropping below zero. But if you’re in a tough financial spot and this isn’t possible, track your account balances closely and monitor your spending, especially when you see your account taking a dip.

Link your accounts

Some banks and credit unions offer the option to link a checking account with a savings account to prevent overdraft. That way, when your checking account falls into overdraft status, your financial institution will automatically draw from another account, preventing overdraft fees from going into effect.

Ken Tumin, founder of DepositAccounts, recommends looking into whether your bank has this feature.

Keep in mind that there may be fees associated, too.

“There are still many banks and credit unions that charge a fee when the overdraft transfer is made,” Tumin said.

Set up low balance alerts

Stay on top of your finances and avoid overdrawing an account by setting up low balance alerts, Tumin said.

These alerts may give you some peace of mind, but don’t let these alerts replace the habit of checking your finances daily. Think of these alerts as an added safety measure when a subscription renewal, bill or delayed payment may unexpectedly hit your account.

Opt out of overdraft coverage

If you want to avoid being hit with overdraft fees, you can opt out of overdraft coverage altogether. But if you choose not to use your bank or credit union’s overdraft coverage service, you should prepare for a different set of outcomes when your account falls below zero.

When you opt out of overdraft protection, you’ll avoid these overdraft fees, but you risk debit card purchases being rejected online or in person. This presents its own challenges, namely that you won’t be able to make any purchases using your debit card until you’ve replaced the funds in your account. But if you frequently overdraw or find yourself subject to significant and repeated overdraft fees when you do, this option may be right for you.

Replace the funds as quickly as possible

If you’ve overdrawn your account, replace those funds as quickly as possible. Some banks and credit unions won’t charge an overdraft fee if, for example, you’ve overdrawn your account by $5 or less. That means that last hasty purchase at the corner store won’t necessarily cost you $35 if you act quickly.

But it’s important to replace those overdrawn funds as quickly as possible to ensure you won’t be charged if another payment goes through. Draw from your savings account or head to your bank to make a cash deposit to avoid paying overdraft fees.

Pros and cons of overdraft protection

Overdraft protection allows consumers the security to continue making transactions even after their checking accounts are overdrawn by linking with a savings account or line of credit. While this spending security feature allows consumers to overdraw their accounts without incurring overdraft fees, there are both pros and cons to overdraft protection:

  • Pro: Transactions approved. You won’t have to deal with the inconvenience or embarrassment that accompanies a declined transaction.
  • Pro: Ready for emergencies. In case of emergency, having overdraft protection can ensure that you can complete transactions without a hefty fee if you need unexpected car repairs, have to stock up at the grocery store or pick up prescriptions when sick.
  • Con: Transfer fees. Overdraft protection comes at a cost, albeit lower than the cost of overdraft fees. At Bank of America, for example, consumers can expect to be hit with a $35 fee when they overdraw their account. But if customers sign up for overdraft protection, Bank of America will charge a $10 overdraft protection fee to automatically transfer between accounts or linked credit cards when account balances are low.
  • Con: Interest can build. Some financial institutions offer the option to transfer funds from a credit card to a checking account to avoid overdraft fees. Be mindful that, just as when you pull out a credit card to pay for a purchase, transfers made from those lines of credit will be subject to interest rates, too.

Want to skip overdraft fees?

Besides linking your accounts, setting up balance alerts and keeping an eye on your spending, you can reduce or skip overdraft fees by selecting a bank that offers overdraft protection at a low rate or by finding a bank that charges no overdraft fees. Chime is an online bank that has no overdraft fees and no required minimum balance, which can serve as a great option for those whose accounts frequently fall toward or below zero.

Consult your bank or credit union to see how you can skip or reduce overdraft fees. Remember, too, that the most effective way to skip overdraft fees is to be mindful of your spending and build a healthy savings account to rely on when your checking account falls close to zero.

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