Overdraft Fees: What You Need to Know

If your bank or credit union steps in to cover a purchase because you don’t have enough cash in your checking account, you’ll likely face an overdraft fee.

Most financial institutions charge this fee when they cover the shortfall between a transaction you made and the money in your account, causing the balance to dip below zero. Overdraft coverage means you don’t need to worry about payments being declined, but you could wind up owing multiple costly overdraft fees.

What is an overdraft fee?

If there isn’t enough money in your account to cover a purchase or payment, your bank or credit union may still allow the transaction to go through — typically for a cost. When this happens, you’ve overdrawn the account, the balance becomes negative and you’ll usually owe your bank an overdraft fee in return for them acting as a line of credit and paying your expenses.

While overdraft coverage means you don’t have to worry about bouncing or declined payments when your balance runs low, the associated overdraft fee can be pricey, and you can rack up multiple fees in a single day.

Most major banks and credit unions charge overdraft fees ranging from $10 to $36. But you can opt out of overdraft protection for one-time debit card and ATM purchases or take advantage of grace periods to replenish your account before the fee hits. A few financial institutions don’t charge overdraft fees and still provide coverage if you overspend.

How much is an overdraft fee?

Overdraft fees can quickly rack up, compounding your money woes and potentially leaving you owing the bank more than the initial purchase that put your account in the red. The Consumer Financial Protection Bureau found that the 175 largest banks in the country typically charge an average overdraft fee of $35, even though most consumers overdraw their accounts by less than $26 and repay the sum within three days.

Even more concerning, you can be hit with multiple overdraft fees within the same day. That means the $35 fee can spiral to more than $100 if several transactions occur while the account has a negative balance. Some banks cap the number of overdraft fees they charge within a day.

Not every bank charges an overdraft fee. Others will only apply a fee only if you overdraw the account by a large enough amount, say more than $50, or fail to reverse your negative balance within a specific grace period, commonly 24 hours or the end of the next day.

Each bank or credit union sets its own overdraft policies and charges. Here’s a breakdown of the fees at some of the largest financial institutions.

Banks with no overdraft fees

Several major banks and credit unions do not charge overdraft fees when you try to spend more than your account balance. They include:

• Citibank
• Capital One
• Truist
• Ally
• Discover
• Alliant Credit Union

Many of these financial institutions provide some form of spending safety before rejecting or declining transactions that put an account in the negative. For instance, Ally allows qualifying customers up to $250 in overdraft coverage with 14 days to bring the account back to zero at no cost.

Before signing up for any bank account, be sure to review the financial institution's overdraft policies. While many banks don’t have non-sufficient funds fees or fees for returned items, some financial institutions still charge it if you try to spend more than your account balance. Non-sufficient or insufficient funds fees usually cost just as much as overdraft charges. Additionally, the company or bank you were attempting to pay might levy a fee for a bounced payment.

Ways to avoid overdraft fees

While overdraft fees are a common feature of most checking accounts, they’re also easily avoidable — and not just for people with hefty balances. If you’re looking to prevent banks from taking a cut of your cash when you’re feeling the squeeze the most, here are a few ways to steer clear of overdraft charges.

Opt out of overdraft coverage

Many banks and credit unions offer a form of overdraft protection for one-time debit card transactions or ATM withdrawals, commonly called debit card coverage, that you can choose to participate in or drop at any time. If you opt out, you needn’t worry about paying overdraft fees, as any purchases larger than your account balance will be declined. Banks can still, however, charge overdraft or non-sufficient funds fees on checks, electronic payments and recurring debit card transactions, like gym memberships or streaming subscriptions. Limiting overdraft coverage can make sense if you frequently overdraw or find yourself subject to significant and repeated overdraft fees when you do.

Set up low balance alerts

While you should regularly monitor your account and outgoing payments, having your bank send you an email, text or other message when your account balance dips below a specific amount can help ensure you won’t run into overdraft charges. Receiving such an alert gives you time to transfer or deposit more money into your account to cover any upcoming transactions, sparing you a potential negative balance and overdraft fee.

Link your accounts

Most banks and credit unions allow you to link your checking account with another account as a way to cover overdrafts. If your checking account lacks the money needed to cover a purchase or payment, your financial institution will automatically draw the funds from this backup savings, checking or credit account. This prevents overdraft fees and allows you to continue making transactions. You will need to enroll in this optional service, usually called overdraft protection, and some financial institutions may charge you a fee for transferring the funds. For instance, Fifth Third Bank levies a $12 charge every time an overdraft protection transfer occurs. If you connect your account with a credit card or other line of credit, you could owe interest on the overdrawn amount.

Replace the money as quickly as possible

If you’ve overdrawn your account, transfer or deposit enough cash to bring it up to a zero balance as soon as you can. Many banks and credit unions wait a specific amount of time before charging an overdraft fee, meaning if you can correct the account within this grace period, you won’t need to pay it. How long you have to do this varies by financial institution. Chase, TD Bank, U.S. Bank, Wells Fargo and Regions, for example, give customers until the end of the next business day to replace the overdrawn amount. Even if you miss the grace period, it's still worth acting fast as some banks charge continuous overdraft fees, meaning you’ll be hit with a new fee each day that the account remains overdrawn.

How to get your bank to waive an overdraft fee

Your bank or credit union may be willing to reverse or refund an overdraft charge if you’ve been a good customer with few or no prior overdrafts. Call the bank’s customer service team and explain the circumstances that led to the overdraft; maybe a direct deposit was late, or an automatic bill payment was larger than anticipated. Explain the steps you took to swiftly bring the account balance back above zero.

If you did not consent to overdraft protection for ATM or one-time debit card purchases but were charged an overdraft fee, you can contest the error with your bank and ask them to refund or remove the wrongful charge. You can also file a written complaint with the Office of The Comptroller of the Currency's Customer Assistance Group.