Understanding Overdraft Fees

An overdraft fee can occur when you spend more money than you have available in your checking account, but your bank or credit union authorizes the transaction anyway and charges you for that service. Not all banks charge overdraft fees, and among those that do, fees vary widely. Understanding how your bank handles overdrafts can help you avoid potentially costly overdraft fees.

How Do Overdraft Fees Work?

Spending more money than you have in your checking account is known as being overdrawn. Transactions via ATM, check, debit card payment, ACH, automatic payments, or cash withdrawals can all overdraw your account. If you don’t have enough money in your account to cover a transaction, the bank may decline it. However, many banks will pay for the transaction—essentially lending you money—and charge an overdraft fee.

For example, suppose you have $100 in your checking account and use your debit card to make a $125 purchase. Your bank may authorize the purchase, cover the $25 you’re short, and charge you a $35 overdraft fee. You now owe the bank $60 ($25 + $35).

How Much Do Overdraft Fees Cost?

Overdraft fees can range from $15 to $37, with many banks charging more than $30 for overdrafts. Depending on your bank’s policies, you might incur multiple overdraft fees in the same day if your bank authorizes several transactions that your account can’t cover. Banks generally set limits on the number of overdraft fees you can be charged in a single day. However, with some banks charging up to five overdraft fees per day, the cost of overdrafts can quickly add up.

How to Avoid Overdraft Fees

The following tips can help you avoid getting hit with overdraft fees:

• Choose an account with no overdraft fees: Many banks have stopped charging overdraft fees altogether. If you’re not happy with high overdraft fees at your bank, do some comparison shopping to see how other banks handle overdrafts.
• Opt out of overdraft coverage: Overdraft fees can add up fast if your account is frequently overdrawn. On average, account holders who opt in to overdraft coverage have seven times as many overdraft fees as those who don’t. Opt out, and your ATM and debit card transactions will be declined if you don’t have enough money, but that can be a small price to pay for savings.
• Cover overdrafts with a linked account: Some banks provide overdraft protection by connecting your checking account to another account at the same bank. Opt in to this service, and when your checking account has insufficient funds to pay for a transaction, the bank will transfer money from your linked account to cover it, with no overdraft fee.
• Monitor your bank account balance: When you have lots of pending transactions, such as upcoming autopayments, it’s easy to become overdrawn. Check your account balance regularly, and you’ll know if you have enough funds to cover a transaction.
• Set up account alerts: Visit your bank’s website or use the mobile app to set up email or text alerts when your account balance dips below a certain level or when a large transaction takes place.
• Call to request a fee refund: Depending on your bank’s policies, you might be able to get an overdraft fee refunded by contacting the bank and explaining what happened. You’ll generally have better luck with this if you’re a longtime bank customer and don’t have a history of overdrafts.
• Repay the overdraft quickly: Some banks won’t charge overdraft fees if you bring your account balance above $0 within a grace period—generally the next day.
• Maintain a cash cushion: If it’s doable for you, keeping some extra money in your checking account can help prevent overdrafts. Make a budget to get a handle on your monthly expenses; then put $250, $500, or $1,000 more than that amount in your checking account to cover any unforeseen charges (and don’t spend it).

The Bottom Line

A growing number of banks are reducing or eliminating overdraft fees, but they can still add up if your checking account balance often drops below $0. Frequent overdrafts can also be a red flag that you’re not living within your means. Unpaid overdraft fees could even affect your credit score if the bank sends your account to collections.

Setting a budget and keeping track of your bank account balance can help you prevent overdrafts, avoid potentially costly fees, and achieve your financial goals. While you’re at it, consider signing up for free credit monitoring from Experian. You’ll get alerts about spending, changes to your credit report, and activity that could indicate fraud. It’s an easy way to keep tabs on your financial health.

Contact O1ne Mortgage for Expert Mortgage Services

At O1ne Mortgage, we understand the importance of managing your finances effectively. If you need any mortgage services or financial advice, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate your financial journey and achieve your goals.