When it comes to banking, there’s one feature everyone hates: fees.
Nonsufficient fund fees.
Account maintenance fees.
ATM fees. (Being. Charged. To. Access. Your. Own. Money.)
But when it comes to unnecessary “junk” fees, one of the worst offenders is the overdraft fee.
We've got Cleo's resident financial advisor, Anna, to answer some of your most-searched questions around over draft fees. Including 10 expert tips on avoiding overdraft fees.
Anna Yen, CFA, is a financial wellness expert with 2 decades of experience in financial markets. This includes on the trading floors of JPMorgan and as a Director at UBS. She specializes in personal finance, derivatives, and alternative investments including crypto.
Over to Anna.
What is an overdraft fee?
Banks charge overdraft fees when you take more money out of your account than you actually have.
How is it possible to overdraw your account balance?
If you enrolled in your bank’s overdraft program, it will pay the amount you’ve overdrawn. But they will also slap a fee on top – an overdraft fee – ranging from $10 to $35.
That’s right – your bank comes to save the day because you’ll pay for it.
Let’s say you try to withdraw $70 more than you have, and your bank charges a $30 overdraft fee. That means you’ll have to pay $100 just to bring your balance back to $0!
How do overdraft fees work?
Federal regulations say that banks can’t charge overdraft fees on ATM withdrawals or debit card spending unless you opt into an overdraft program. As part of the program, the bank loans you money when your balance reaches zero or dips below.
The overdraft program is described in the paperwork when you open a checking or savings account. (Which is why you should always read the fine print!)
While opting out means you won’t pay an overdraft fee, the bank may deny your transaction if you try to spend money that’s not available.
That’s not the end of the story though – banks then charge a non-sufficient funds (NSF) fee. Bounced checks or denied automatic payments can also result in an NSF fee.
Watch out for multiple overdraft fees
Because these fees are charged on each overdraft, you might see several fees hit your account in a single day. For instance, if you keep overdrawing your account on four separate purchases, you might pay four overdraft fees.
Some banks also charge continuous or extended overdraft fees, which adds a new overdraft fee for each day your account stays overdrawn.
Banks decide which same-day transactions go first
If you think the bank processes transactions in the order you make them, think again.
Suppose you have $50 left in your account, but you plan to buy a $40 gift for your mom later in the evening. During the day you spend $10 three times, and your balance is now $20.
You figure that when you buy the $40 gift, you’ll only be charged one overdraft fee.
Banks can wait until the end of the day and process the largest transactions first, including any scheduled bill payments. If the $40 transaction goes through first, followed by the three $10 purchases, you owe two overdraft fees instead of one.
Why do banks charge overdraft fees?
Banks charge overdraft fees to compensate for the risk they take covering their customers’ overdrawn balances. Unfortunately for us, financial institutions also use fees as a source of revenue.
The Consumer Financial Protection Bureau (CFPB) considers overdraft fees to be “junk fees” that often take advantage of “timing and process issues.”
For example, you might be hit with overdraft fees in the days before your paycheck arrives. And at the time you’re trying to spend from an existing account, you don’t have the option of using another bank that might charge lower fees.
How much money do banks make from overdraft fees?
Each bank sets its own overdraft fees, but they generally cost between $10 and $35 per transaction.
Wells Fargo, for example, assesses a $35 fee, while Chase Bank charges $34. Bank of America is on the lower end at just $10 per overdraft. And since 2021, some banks – like USAA and Capital One – have completely eliminated overdraft fees.
Additionally, the bulk of these fees are applied on transactions under $25. Many overdraft fees are higher than the overdrawn amount!
The CFPB estimates that overdraft and NSF fees cost consumers over $15.5 billion nationwide in 2019. And though several banks have since lowered or eliminated these fees, they topped at least $8.3 billion in 2021.
The impact of overdraft fees on consumers
These fees can add up quickly.
CFPB data shows that these extra fees hit families that can’t afford them the hardest. Around 90% of frequent overdrafters average a few hundred dollars in their account on any given day.
Even if you are on your way to managing your expenses, overdraft fees can quickly push you over budget.
How to avoid overdraft fees
Overdraft fees are an unnecessary expense that you can easily avoid – if you know how.
👀 Look before you leap
Federal law requires banks to disclose all account-related fees, including overdraft fees, when you sign up. Before opening an account, ask for a fee schedule.
If high overdraft fees make that list, you might look elsewhere for an account.
🙅 Don’t opt-in
If your bank offers an overdraft program, you can choose not to sign up in the first place. (Or ask to opt-out if you’ve already joined.) You’ll still need to pay attention to your account balance to avoid a nonsufficient funds fee.
⛅ Choose an overdraft protection alternative
Some banks offer an alternative to overdraft programs called “overdraft protection” plans. Under overdraft protection, you generally have two options, though different types of fees may still apply:
Linking another account
One option is to link your checking account to another account, like a savings account. If you overdraw your checking account, the shortfall will be pulled from the linked account. Even if you have enough funds, you may have to pay transfer fees.
Opening an overdraft line of credit
Overdraft lines of credit act like a credit card attached to your bank account.
If you run out of money, any additional spending is charged to your line of credit. Note that if you don’t repay your debt within a set time frame – you may owe interest on the balance.
Heads up: your ability to qualify for a line of credit may depend on your credit score and/or banking history.
💵 Keep extra cash in your account
You may have heard about the wisdom of keeping an emergency fund on hand. This is extra money that you save to pay for unexpected expenses, like medical bills or a broken car.
Similarly, it’s wise to keep extra cash in your account to cover smaller issues, such as preventing accidental overdrafts.
🔍Track your expenses
Keeping a close eye on your expenses is a good idea beyond monitoring fees. The more you know about your spending, the easier it is to manage payments and stay on top of overdraft fees.
📊 Only spend your available balance
While they sound similar, your current and available account balances aren’t actually the same thing.
Your current account balance is the amount of money you have in your account right now. This balance includes transactions that have been completely processed and posted to your account. But it does not reflect changes from “pending” transactions that have been authorized but not posted.
That’s what your available account balance is – it’s your current balance, including any pending payments or deposits.
How current vs. available balances work
For instance, say that you have $1,000 in your account and make a $500 credit card payment on Monday. But after making your payment, that $500 sits in your account as “pending” until fully processed on Friday.
From Monday until Thursday, your bank account may show a “current” balance of $1,000, even though half that money isn’t “yours” anymore. Your available balance is actually $500. If you try to spend more than that, you’ll overdraw your account.
On Friday, when the credit card company pulls the money from your account, your current balance updates to $500. Finally, your current and available balances show the same number.
Take note of your available balance, not the current balance, if you’re trying to figure out how much you can spend.
🚨 Set up balance alerts
Most banks offer online banking or a dedicated mobile phone app with text or email alerts for low account balances. Setting up alerts means you’ll know when you’re close to your limit. When that happens, you can try to avoid a negative balance by moving money around or spending less.
⏰ Pay your fees quickly
If you’ve already overdrawn your account, paying it within a few hours may save you the fee. Some banks now offer grace periods so you can bring your account back to black penalty-free.
📱 Talk to your bank
As a last resort, you can call your bank and request a fee reversal. You’re more likely to succeed if you have a history of keeping your account positive. Of course, having the money on hand to cover your negative balance immediately also helps.
💙 Let Cleo do the work for you
Signing up for Cleo simplifies tracking your expenses and account balances. The closer you watch your balance and account history, the less likely you are to overdraw.
If your account balance dips too low, alerts notify you so that you can avoid a negative balance.
Don’t let overdraft fees eat into your finances
Let’s be frank: overdraft fees suck. They’re the bully that kicks your bank account balance when it’s already down.
In recent years, the CFPB has started investigating these “junk fees” for targeting lower-income Americans while boosting bank profits. A few banks started dropping the fees altogether, but overdraft fees still lurk in many fee schedules. It’s still up to you to figure out when they might affect you.
Fortunately, you can take steps to avoid fees, from opting out of overdraft programs to keeping savings in the wings.
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Big love. Cleo 💙