What is an overdraft fee?
An overdraft fee is a penalty that banks charge when a payment made with a debit card or check exceeds the balance of available funds in the account holder's checking account. Instead of declining a charge, your bank will cover the payment and charge a fee.
If you overdraft, you will owe the money for the original purchase as well as the overdraft fee.Â
Overdraft fee example
Each time payments exceed the available funds in your account, a penalty fee will be assessed. For example, if you have $20 in your checking account and buy a $30 item, your bank will clear the transaction. However, the bank will charge you anoverdraft fee. Your bank will take the remaining $10 that's owed plus the overdraft fee when you make your next deposit.
Your bank may provide overdraft protection. In this case, any purchases that exceed your account balance will still be paid by the bank. However, your account may remain at a negative balance until your next deposit.
How much do overdraft fees cost?
Overdraft fees vary across financial institutions. According to a Bankrate study, the average overdraft fee is $29.80. And the fee is fixed regardless of the transaction amount -- you're charged the same whether you overdraw $1 or $100.
Some banks, such as Capital One and Citibank, have recently decided to stop charging overdraft fees. Other banks have simply cut back on the fee amount, like Bank of America, which recently slashed fees from $35 to $10.
While some banks are reducing or even eliminating overdraft fees, they're still a major penalty for consumers. Research from the Consumer Financial Protection Bureau found that banks earned $15.47 billion from overdraft fees in 2019. The five biggest U.S. banks charge overdraft fees.
| Bank | Overdraft fee |
|---|---|
| Chase Bank | $34 |
| Bank of America | $10 |
| Wells Fargo | $35 |
| Citibank | $0 |
| U.S. Bank | $36 |
How to avoid overdraft fees
1. Opt outÂ
Your bank or credit union can't charge overdraft fees unless you've agreed to them, according to the CFPB. Once you opt out, transactions that exceed your available balance will be declined. If you write a check and it bounces -- meaning a merchant returns the check to your bank due to insufficient funds -- your bank may hit you with a nonsufficient funds fee. It's essentially the same fee -- exacted when you don't have enough money to cover a transaction -- called by a different name.
2. Link your savings account with your checking accountÂ
When you link accounts, some banks will pull from your savings account to cover a transaction when you have insufficient funds in your checking account. Assuming you have money in savings, this is a far less costly option.
3. Link your checking account to a line of creditÂ
Contact your financial institution to see if you can connect your checking account to a credit card. You may still have to pay a fee and interest -- but it's usually cheaper than paying the overdraft fee, according to the CFPB.
4. Sign up for low-balance alertsÂ
Your bank may offer low-balance alerts through email or text message. These alerts will notify you when your balance falls below a certain threshold, which you can dictate.
5. Open a checking account without overdraft feesÂ
Some banks offer checking accounts that don't charge overdraft fees and other banks have eliminated them. Capital One, Ally, Discover, Chime, Axos and Aspiration all offer accounts with no overdraft fees. Moreover, some banks are starting to limit the fee amount, like Bank of America, which reduced its fee from $35 to $10 in May 2022.
