Bank Overdraft Fees: How They Work and How to Avoid Them

What is an overdraft fee?

An overdraft fee is a penalty that banks charge when a payment made with a debit card or check exceeds the balance of available funds in the account holder’s account Bank account. Instead of refusing a charge, your bank will cover the payment and charge a fee.

In the event of an overdraft, you will owe the money for the original purchase as well as the overdraft fee.

Example of an overdraft fee

Whenever payments exceed the funds available in your account, a penalty will be applied. For example, if you have $ 20 in your checking account and you buy a $ 30 item, your bank will cancel the transaction. However, the bank will charge you an overdraft fee. Your bank will take the remaining $ 10 plus the overdraft fee when you make your next deposit.

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Your bank may provide overdraft protection. In this case, any purchases that exceed your account balance will still be paid for by the bank. However, your account may remain with a negative balance until your next deposit.

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How much do overdraft fees cost?

Overdraft fees vary between financial institutions. According to a Bankrate study, the average overdraft fee is $ 29.80. And the fee is fixed regardless of the transaction amount – you are charged the same regardless of whether you exceed $ 1 or $ 100.

Some banks, such as Capital One and Citibank, recently decided to stop charging overdraft fees. Other banks have simply reduced the commission amount, such as Bank of America, which recently reduced the fees from $ 35 to $ 10.

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While some banks are reducing or even eliminating overdraft fees, they are still a severe penalty for consumers. Research from the Consumer Financial Protection Bureau found that banks earned $ 15.47 billion from overdraft fees in 2019. largest American banks charge overdraft fees.

Overdraft fees charged by major US banks

Bank Overdraft fee

Chase Bank

$ 34

Bank of America

$ 10

Wells Fargo

$ 35

Citibank

$ 0

Bank of the United States

$ 36

How to avoid overdraft fees

1. Opt out

Your bank or credit union cannot charge overdraft fees unless you have agreed to them, according to the CFPB. Once deactivated, transactions that exceed the available balance will be rejected. If you write a check and it bounces, which means a merchant returns the check to your bank due to insufficient funds, your bank may hit you with an insufficient funds fee. It’s essentially the same fee – required when you don’t have enough money to cover a transaction – called by a different name.

2. Link your savings account with your checking account

When you link accounts, any amounts not covered by your checking account will automatically be covered by yours savings account. Assuming you have money saved, this is a much less expensive option.

3. Connect your checking account to a line of credit

Contact your financial institution to see if you can link your checking account to a credit card. You may still have to pay a fee and interest, but it’s usually cheaper than paying the overdraft fee, according to the CFPB.

4. Sign up for low balance alerts

Your bank may offer low balance alerts via email or SMS. These alerts will notify you when your balance drops below a certain threshold, which you can dictate.

5. Open a current account without overdraft fees

Some banks offer current accounts that do not charge overdraft fees and other banks have eliminated them. Capital One, Ally, Discover, Chime, Axos and Aspiration all offer accounts without overdraft fees. Additionally, some banks are starting to limit the commission amount, such as Bank of America, which will reduce its commission from $ 35 to $ 10 starting in May.

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