2022-06-01
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What Is An Overdraft Fee

And why we hate them with the fire of a thousand suns

Illustration of an overdraft invoice
IN THIS ARTICLE:

Aside from being our mortal enemy, an overdraft fee is what a bank charges you for overspending in your account. Whenever you make a purchase and the balance in your bank account goes below zero, your bank generously fronts you the missing funds.

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Of course, your bank - let's call them Fells Wargo - doesn't just give you the money. They charge you an overdraft fee for helping you out.

How do you avoid bank overdraft fees?

If your balance is below zero, you can avoid overdraft fees if you deposit money at a branch (lol) before the end of the business day or at an ATM before 11pm ET (8pm PT). Online check deposits are probably more reasonable.

But before it comes to that, you can also set up notifications on your bank's website or app to alert you before you get charged a  bank overdraft fee.

Most banks offer a service called "Overdraft Protection" where anytime you go negative they'll see if they can cover the missing amount by dipping into your savings.

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But to be honest, that's not always a great service to sign up to.

Why "Overdraft Protection" is BS

The name makes it sound like like they're protecting you from overdraft fees. But they're not.

What signing up for overdraft protection actually means is that your transactions will always go through, even if you have insufficient funds.

"Wait, that means I'd be overspending on my account? Isn't that why they charge me an overdraft fee in the first place?"

Yes. You're right. Pretty shady eh?

Overdraft protection is mostly about protecting you from the embarrassment or hassle of having your card declined.

But to us, it's better to be declined then charged an additional $35 of money you don't have.

So hop on to your online banking and see if you can't decline overdraft protection.

Note: Different banks will call this different things, so just be sure you're declining the right service.

What else can i do to avoid bank fees?

It's also a great idea to do an audit of your subscriptions and auto payments, and make sure you have enough in your account to cover the upcoming month. Yes, there's an app for that.

The most surefire way to make sure you don't get charged overdraft fees is to make sure there are enough funds in your account.

But there are always times when unexpected costs come up...like you know, every god damn week.

So if you need a cash advance, we can help. It's not the perfect solution. but it's better than paying an overdraft fee. (Eligibility requirements apply)

Can I get an overdraft fee refunded?

Do you believe in miracles?

If you give your bank a call and ask for a refund directly, sometimes you can get your overdraft fee refunded. It does happen, especially for long time customers.

The bank is more inclined to give you a refund if you're a loyal  bank customer, if going into overdraft is a rare occurrence, or if you're going through financial difficulty.

Be prepared to argue your case, and also to not get a refund. It's worth a try though, as overdraft fees can quickly rack up!

We've written a bit more on this here, so give it a read if you're up for learning more.

Why do banks charge overdraft fees?

Banks charge an overdraft fee to cover the cost of paying off your transaction.

If you don't have enough money in your account, but need to make a payment, your bank will do you the favor of making sure the payment goes through but charge you a fee for it.

Now does it need to be $35 per transaction, which is what most banks charge.

We think not.

Banks make over $30 billion per year from overdraft fees, so it's a big business for them. Not cool.

If you're curious to see what your bank charges you and how it compares - there's a nifty table over here.

There's even a few that have eliminated overdraft fees all together, which is definitely a step in the right direction. (And also goes to show that you don't always have to charge your customers when they overdraft.

So maybe a better way to answer the question "why do banks charge overdraft fees?" is because it makes them lots of money.

Will getting an overdraft fee hurt my credit score?

Nope. At least not at first.

Credit bureaus won't get access to your checking account information, because the money is not borrowed.

However, if you keep getting charged overdraft fees and don't bring your account back up to zero, your bank may send the outstanding balance to a collections agency to settle the debt.

This will be reported to credit bureaus and might affect your score.

What should I do if I accidentally overdraft?

First things first. Take a deep breath. It happens.

In fact, we'd argue that modern retail banking encourages over drafting by design. That's because transactions aren't settled in real-time. There's always a time lag between when you spend the money and when it leaves your account. So it's way too easy to spend money you don't have.

And yeah that's pretty unfair and basically the reason why we started this money app.

Ok back to the topic.

1. Breathe.

2. Try one of the 5 things on this list

If you're overdrafting more than you'd like to, consider getting a money app that helps you track your bills and spending each month.

Obvi we think Cleo's one of the best budget apps, but shop around. It's worth it because if the banks aren't going to look out for you,  you've got to do it yourself.

It sucks, but that's the game.

For now.

Enjoy this post? Please give it a share or send it along to a friend. You never know, it could make a big difference. And of course, if you want to try the best money app in the world for free, just hit this link right here.

Big love. Cleo 💙

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