What is an overdraft fee, and how can you avoid it?

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Bank fees are a common reality for most account holders, and overdraft fees stand out as one of the most expensive charges. While most banks provide overdraft protection to cover overdrafts, it often comes at a steep price.

Understanding how to avoid overdraft fees on your debit card or bank account can save you significant money in the long run.

What is an overdraft fee?

Banks charge an overdraft fee when you make a payment without enough money in your checking account to cover it.

For example, if you have $35 in your checking account and use your debit card to pay for a $60 dinner, your account will be overdrawn, and you may get charged a fee. Some banks offer overdraft protection, which can help customers cover an account overdraft, but these services may also charge a fee.

Banks don’t charge overdraft fees solely for debit card activity. You can overdraw your account in other ways, such as writing a check cashed later when you don’t have enough funds for the total amount. Automatic bill payments can also lead to overdrafts if you’re not careful. 

Overdraft fees cost an average of $26.11, according to a Bankrate survey. They can add up quickly, too, depending on your bank’s fee structure. Wells Fargo, for example, charges a standard $35 overdraft fee and may charge up to three per day.

What are the consequences of overdraft fees?

Overdraft fees immediately increase the cost of your purchase beyond what you budgeted. For example, a $15 lunch that triggers an overdraft could cost $40 or more with the added fees. 

However, the long-term impacts are even more troubling. 

According to research from PYMNTS.com, 20% of individuals who used overdraft protection to cover an expense of $400 or more had to take out more loans to repay the debt, and 28% reported credit score damage. 

Repeated overdraft fees can lead to a cycle of financial struggle, damaging your credit score and making it harder to qualify for loans or credit cards in the future. Research from the Consumer Financial Protection Bureau (CFPB) shows that 81% of frequent overdrafters struggle to pay at least one bill annually. 

Overdraft fee vs. NSF fee

If you’re studying your bank’s fee structure and notice a line item for NSF fees, this stands for non-sufficient funds fee, which can go hand in hand with an overdraft fee. 

Your bank may charge an NSF fee if a transaction doesn’t go through because there isn’t enough money in your account, says Erik Croak, a certified financial planner.

“Overdraft fees kick in when your bank decides to cover the transaction for you, despite the insufficient funds, instead of declining it,” he says. “This means that your bill gets paid on time, or your check clears, but at the cost of an additional fee for this service.” 

What to do if you incur an overdraft fee

If you log into your online account and realize you have overdrawn it, Croak recommends you call the number.

“The best step is simply asking your bank to waive the fee,” says Croak. “Even if you're just slightly short on funds, your bank might still hit you with the full overdraft fee. If you've been a good customer and rarely overdraft, it's worth giving them a call. You might end up speaking to a sympathetic service representative who can help waive the fee if you explain your situation.”

If the bank won’t help you out, you may still be able to avoid the fee if you act fast. Some banks offer extended grace periods, allowing you to transfer funds to cover the transaction.

For example, Regions allows customers to bring the account balance to the necessary amount by 8:00 p.m. on the business day after the overdraft occurs.

Overdraft protection services

Many banks now offer alternative options to standard fee-based overdraft coverage (where they pick up the tab). For example, you may be able to link your checking account to a savings account or a line of credit.

“By linking your checking and savings accounts, if you overdraw, your bank will automatically transfer the needed funds from your savings instead of charging you an overdraft fee,” says Croak. “There might be a smaller flat fee involved with this option, but it’s usually around $10, less than traditional overdraft fees. It’s a good idea to check the specific details with your bank.”

The upside of overdraft protection is that you’ll avoid excessive overdraft fees. The downside, however, can include monitoring another account balance in the linked savings account. If you fail to meet the minimum balance requirement, you could pay a monthly service fee for that account unless it’s a free savings account.

Banks that offer overdraft protection

Many banks offer overdraft protection services, including Chase, PNC Bank, and Wells Fargo. Some banks are even going beyond traditional overdraft protection:

• Ally Bank: Eliminated overdraft fees entirely
• Chime: Offers up to $200 in fee-free overdraft coverage with qualifying direct deposits
• Discover Bank: No overdraft fees on any accounts
• Capital One: Eliminated overdraft fees and offers free overdraft protection

Check with your bank to learn more about overdraft protection tools that allow you to link a savings account or line of credit.

How to avoid overdraft fees

No one wants to pay overdraft fees, and the good news is that you don’t have to: You have to opt into your institution’s overdraft policy to let them charge you these fees. If you want to be sure that you’ll never pay for overdrawing your account, say no. Consider these additional tips to make sure you never pay for overdrawing your account:

• Set up account alerts: Log into your online banking platform and program a text and email alert if your balance dips below a certain threshold. If you know you only have $50 in your checking account, you can transfer some funds to verify that you have prepared for bigger expenses.
• Check your account balance regularly: Tracking your checking account balance is the simplest way to avoid overdraft fees. 
• Consider switching to a bank that doesn't charge overdraft fees: Many banks offer free overdraft transfer protection when linked to a savings account. 
• Avoid auto pay for your variable expenses: Your utility bills can vary wildly from month to month. Rather than ask the company to automatically pull the funds from your account on the first of the month, consider manually setting up reminders to pay these bills. 
• Read the fine print: As more banks have eliminated overdraft fees, some have started offering expanded options that are more consumer-friendly. Ally, for example, provides a service called CoverDraft that can cover up to $100 ($250 in some cases), and the bank will simply reimburse itself for your next deposit.

Frequently asked questions

The bottom line

Overdraft fees have been getting smaller across the financial industry, but they can still be an issue if you need help monitoring your account balance. The good news is that it’s easy to steer clear of them. You can use overdraft protection to make sure you won’t ever pay a fee, and you can arrange account alerts to keep a close eye on your balance.

And if you’re unhappy with your bank’s overdraft policies, remember you have plenty of options. Don’t hesitate to shop around for a new home for your money with a more friendly fee structure. 

Editorial disclosure: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.