What’s an Overdraft Fee? And How to Avoid Them

The dreaded overdraft fee — it’s like getting kicked while you’re down. Just when you thought you had a handle on your finances, your bank hits you with an extra charge for accidentally spending more than you had in your account.

But what’s an overdraft fee, exactly? Find out how overdraft fees work, how much they cost, and — most importantly — how to steer clear of them.

What’s an overdraft fee?

An overdraft fee is a charge banks and credit unions impose when you spend more money than is in your checking account. Essentially, the financial institution covers the cost of the transaction, leaving you with a negative bank account balance. The overdraft fee is the price you pay for this service.

You might incur overdraft fees for several reasons, like losing track of your account balance and overspending or forgetting about automatic payments or subscriptions that withdraw funds from your account. Unexpected expenses or delays in depositing funds can also lead to overdrafts.

Here’s an example of how this might play out. Let’s say you have $50 in your checking account, but you make a $75 purchase. If you have overdraft protection, the bank covers the extra $25 and charges you an overdraft fee, typically around $25. This means that the total cost of the transaction becomes $100: the original $75 purchase plus the $25 fee (a 33% price bump).

Overdraft fees can add up quickly, especially if you make multiple transactions while your account is overdrawn. Some banks may also charge additional fees for each day your account remains in the negative.

How much is an overdraft fee?

Overdraft fees vary depending on your bank or credit union. But the average overdraft fee is $26.61, which is the lowest it’s been in 19 years. Still, some banks charge fees as high as $38 per overdraft. And even $26.61, which might not sound like it’ll break the bank, can add up quickly if you frequently overdraw your account.

Banks also have different fee structures. Some charge a fee for each transaction that overdraws your account, while others charge a single daily fee for multiple overdrafts. And some don’t charge overdraft fees at all.

How to avoid overdraft fees

Bank overdraft fees can be costly. Luckily, there are effective strategies you can employ to avoid them altogether. Here are five ways to steer clear of overdraft fees:

1. Keep an eye on your balance

An effective way to avoid overdraft fees is to regularly monitor your account balance. By tracking your spending and deposits, you can ensure you have the funds for your transactions. Consider using online or mobile banking tools to check your balance frequently.

It’s also wise to use free resources like EarnIn’s Credit Monitoring tool to monitor your credit. If over-drafting has diminished your credit score in the past, you can pay better attention to your accounts and watch your score improve.

2. Set alerts

Many banks offer an alert feature that notifies you when your account balance falls below a certain threshold. This way, you’ll get a heads-up when you’re at risk of overdrawing your account, giving you time to transfer funds or hold off on making purchases.

With EarnIn’s Balance Shield, you can turn on notifications when your balance dips below a certain amount. You can also set up an automatic Cash Out to avoid low bank balances.

3. Link a savings account

Some banks allow you to link your checking account to a savings account to cover overdrafts. If you overdraw your checking account, the bank automatically uses funds from your savings account to cover the transaction.

4. Switch bank accounts

If you frequently incur overdraft fees, consider switching to a bank that doesn’t charge them. Capital One, Ally Bank, and Alliant Credit Union all offer checking accounts with no overdraft fees. While these accounts may have other requirements or limitations, they can be a good option if you want to make overdraft fees a thing of the past.

5. Turn off automatic overdrafts

Some banks require you to opt in for overdraft protection for debit card and ATM transactions. If you don’t opt in, your transactions are declined if you don’t have enough funds in your account (instead of triggering an overdraft fee). Consider turning off automatic overdrafts to avoid the temptation of spending more than you have.

Dealing with overdraft fees

Even with the best intentions, slip-ups happen. If you find yourself facing an overdraft fee, here are a few steps you can take to get it waived:

Contact your bank

Start off by reaching out to your bank or credit union and explaining your situation. Many banks are willing to waive overdraft fees, especially if it’s your first time or you’re a long-time customer in good standing. Be polite and honest in your request, and ask if they can offer you a one-time courtesy waiver.

Ask about grace periods

Some banks offer grace periods for overdrafts, giving you a window of time to deposit funds and avoid the fee. Ask your bank if it has grace periods or overdraft forgiveness programs you can take advantage of.

Use apps

Some services can automatically negotiate fees with your bank on your behalf. You can also try Earned Wage Access apps like EarnIn to access your paycheck early and avoid overdrafting in the first place.

Learn from the experience

Finally, treat the experience as a learning opportunity. Reflect on what led to the overdraft and consider how to avoid similar situations. Whether it’s setting up alerts, keeping a closer eye on your balance, or exploring accounts without overdraft fees, use the experience as motivation to take control of your finances moving forward.

Don’t let overdraft fees rule your finances

Set up low-balance alerts to stay informed and have extra protection with EarnIn’s Balance Shield. Plus, access your money as you earn it — instead of waiting for payday. With EarnIn’s Cash Out tool, you can get up to $100/day or up to $750/pay period with no credit checks, no interest, and no mandatory fees.

Use your money more confidently with EarnIn.

FAQs

Can you overdraft a credit card?

No, you can’t overdraft a credit card like you can with a checking account. Credit cards have a set credit limit, and if you attempt to make a purchase that exceeds your credit limit, the transaction is typically declined. Some credit card issuers may allow over-the-limit transactions for a fee, but this isn’t the same as an overdraft fee and is less common.

Can you get an overdraft fee on a debit card purchase?

Yes, you can get an overdraft fee on a debit card purchase if you’ve opted into your bank’s overdraft protection service for debit card transactions. If you haven’t opted in, your debit card transactions will be declined if you don’t have enough funds in your account, and you won’t be charged an overdraft fee.

What’s the difference between an overdraft fee and a non-sufficient funds (NSF) fee?

An overdraft fee is charged when the bank covers a transaction that exceeds your available account balance, allowing the transaction to go through. And a non-sufficient funds (NSF) fee is charged when the bank rejects a transaction that would cause an overdraft, but you don’t have overdraft protection. In both cases, you’ll be charged a fee. But with an NSF fee, the transaction won’t be processed, and the check or payment will be returned unpaid.