Managing your personal finances can be tricky — especially when banks charge certain account fees and it’s not always clear why. One of the more common charges is an overdraft fee. These can catch you off guard and add up quickly, throwing off your budget.
Let’s explore what bank overdraft fees are and how you can avoid them.
What is an overdraft fee?
An overdraft fee is a charge you incur when you spend more money than what is available in your checking account. Surprisingly, they are not the same things as a non-sufficient funds fee. An overdraft fee occurs when the bank allows the transaction to go through and simply covers the rest — causing your balance to go negative. A NSF fee happens when they decline the transaction because you don’t have sufficient funds to cover it.
An overdraft fee can happen due to unforeseen expenses or when you’re not accurately tracking your account balances. When an account dips below zero, the bank may impose this penalty.
It’s important to note that these fees can negatively affect your financial health. The amount charged can vary by institution and they can accumulate quickly. Some banks offer overdraft protection which can help. This allows you to link a different account to draw from when your primary account is overdrawn. However, they can come with transfer fees and other terms and conditions.
When do overdraft fees get charged?
Overdraft fees are charged when a transaction exceeds your account balance, resulting in a negative balance. This can happen with a few different types of transactions, such as when you make a debit card purchase and don’t have enough funds to cover the cost. You may not be charged immediately as many banks have a grace period which gives you some time to transfer funds after overdrawing your account.
Not all transactions will automatically trigger an overdraft fee, and some banks don’t charge overdraft fees at all. In some situations, the bank may decline the transaction if there are insufficient funds, while others may cover the difference. and choose not to apply a fee.
How much are overdraft fees?
On average, an overdraft fee will cost more than $25, which can add up quickly if you frequently find yourself in the red. The actual cost will depend on the financial institution you bank with. Keep in mind some banks don’t charge you when you overdraw your account or if you have signed up for overdraft protection. When you open a bank account, read through your account agreement to understand what you may be paying.
How do you avoid overdraft fees?
Avoiding overdraft fees starts with careful money management and account monitoring. Here are a few ways to avoid overdraft fees.
Build up your emergency fund. The best way to avoid overdrafts in the future is to work on building up your emergency fund. A well-funded savings account can help you manage unexpected expenses and avoid borrowing money. If you don’t have an emergency fund, it’s a good idea to open an easily accessible savings account specifically for use when cash flow is low. Read our guide for more help building up your emergency fund.
Keep an eye on your checking account. Monitoring your balance can help you avoid an overdrawn account. Using online banking and mobile apps can help you stay informed about your available balance.
Set up account alerts. Many banks offer low-balance alerts that will notify you when your account dips below a certain number. These alerts can serve as a helpful reminder to adjust your spending or to transfer funds from a savings account to cover upcoming expenses.
Create and stick to a budget. A budget can help you divvy up your income and ensure you have enough funds to cover your expenses. By tracking your spending and setting limits, you’ll be better equipped to maintain a positive balance.
Use a line of credit. A line of credit is a type of revolving financing that offers a longer repayment period than the typical bank overdraft. Revolving credit allows you to borrow money when you need it up to the credit limit. Instead of paying interest and fees on the full loan principal like you would on a personal loan, you only pay interest and fees for a line of credit on the amount that you actually borrow. Additionally, a line of credit stays open and available to use whenever you need it. This type of financing works great for occasional budget shortfalls, emergency expenses and financial peace of mind.
How do you get overdraft protection?
Overdraft protection is a service offered by many banks. It allows customers to link a second account. When they make a transaction and don’t have enough money in their primary account, the funds will be automatically transferred from the second account. Overdraft services can cover things like ATM withdrawals, debit card transactions, checks, automatic bill payments and more.
To sign up for overdraft coverage you’ll need to:
- Understand the terms. Before signing up for overdraft protection, you should make sure you understand all the terms and conditions. Pay attention to any fees, interest rates and coverage limits. Understanding all the terms will help you make an informed decision.
- Contact your bank. How you sign up will vary depending on the financial institution. Typically, you can start by visiting your bank’s website. In many cases, they offer clear and comprehensive instructions online, including FAQs and helpful tips. Alternatively, you can call their customer service and have them walk you through the process.
- Link an account. Once you’ve signed up, you’ll need to link a second account for the primary account to draw from. This might be a savings account, credit card or line of credit. The account you choose to link can have a big impact on your finances. If you have multiple overdrafts you can drain your savings or rack up debt on your credit card or line of credit. Additionally, keep in mind that overdraft protection may come with it’s own fees, and if you link a credit card or line of credit you may also incur interest charges.
Can you get overdraft fees waived?
In some cases, banks and credit unions may refund an overdraft charge, especially if it’s a one-time occurrence or if you’re a loyal customer. To get an overdraft fee waived, you can reach out to your financial institution’s customer service and explain the situation. If it’s the first time you’ve overdrawn your account, it definitely pays to ask. Many banks are willing to waive fees for customers who demonstrate good financial habits and a positive banking history.
The Bottom Line
Overdraft fees happen, but it’s important to remember that with the right tools and knowledge you can keep them from happening again. Keeping track of your account balances, setting up low-balance alerts and creating an emergency fund can help you avoid these charges. By taking these steps you can help minimize the impact overdraft fees have on your financial health.
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