Overdraft fees: what they are and how to avoid them
In short: an overdraft happens when you spend more than is in your account and the bank pays anyway, usually for a fee. Banks may only charge an overdraft fee on ATM withdrawals and one-time debit card purchases if you have opted in. Watching your balance, setting low-balance alerts and linking a savings account can help you avoid fees.
How overdrafts happen
Your balance may look fine, but a check, an automatic bill or a pending card payment can clear before your pay arrives. If the bank covers the shortfall, your balance goes below zero and you may be charged an overdraft fee. Several small purchases can each trigger a fee on the same day.
Overdraft fee vs NSF fee
- Overdraft fee: the bank pays the transaction and charges you.
- NSF (non-sufficient funds) fee: the bank declines or returns the payment, such as a check or automatic bill, and may charge you. The company you were paying might charge a returned-payment fee too.
Many banks have cut or dropped these fees in recent years. Check your account's fee schedule to see what applies to you today.
Your right to opt in or out
Under federal rules, a bank can't charge an overdraft fee on ATM withdrawals or one-time debit card purchases unless you have agreed (opted in). If you don't opt in, those transactions are usually just declined at no fee. You can change your choice at any time. This rule doesn't cover checks and automatic payments, which can still overdraw your account.
Ways to avoid fees
- Turn on alerts for a low balance and for large transactions.
- Track pending payments, not just the balance shown.
- Link a savings account for overdraft protection transfers; ask if there is a fee for each transfer.
- Time your bills for just after payday; many companies let you change the due date.
- Choose an account without overdraft fees, such as one certified under the Bank On standards.
If you're charged
Bring your account above zero quickly, since some banks charge again if it stays negative. If it is a first or rare overdraft, call and ask politely whether they will refund the fee; many banks sometimes do. If you think a fee was charged wrongly, ask for an explanation in writing, and you can complain to the CFPB.
Handy tools
- Monthly budget planner: see what is left each month and how your spending splits up.
General information, not financial advice. Rules, fees and rates change and depend on your situation. Check with your bank, the provider or a qualified professional before you decide.
Sources
- CFPB: How can I avoid debit card overdrafts?
- CFPB: If I opted into debit overdraft, can the bank still decline a purchase?
- CFPB: How do automatic payments from a bank account work?
- eCFR: 12 CFR part 1005 (Regulation E)
- Cities for Financial Empowerment Fund: Bank On national account standards