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 by debit card or check exceeds the balance of available funds in the owner’s account. check account. Instead of rejecting a charge, your bank will cover the payment and collect a fee.

If you overdraw, you will owe the money from the original purchase as well as the overdraft fee.

Overdraft Fee Example

Any time payments exceed the available funds 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 authorize the transaction. However, the bank will charge you an overdraft fee. Your bank will take the remaining $10 due 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 by the bank. However, your account may remain in a negative balance until your next deposit.

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How much are overdraft fees?

Overdraft fees vary among financial institutions. According to a Bankrate study, the average overdraft fee is $29.80. And the fee is flat regardless of the transaction amount — you’re charged the same whether you overdraw $1 or $100.

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

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While some banks are reducing or even eliminating overdraft fees, they remain a significant penalty for consumers. Research from the Consumer Financial Protection Bureau found that banks made $15.47 billion from overdraft fees in 2019. The five the largest banks in the US charge overdraft fees.

Overdraft fees charged by the largest US banks

Bank overdraft fee

chase bank

$34

Bank of America

$10

fargo wells

$35

Citibank

$0

US Bank

$36

How to avoid overdraft fees

1. Opt out

Your bank or credit union can’t charge overdraft fees unless you’ve agreed to them, according to the CFPB. Once you opt out, transactions that exceed your available balance will be declined. 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 charge you 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.

two. Link your savings account with your checking account

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

3. Link 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 generally cheaper than paying the overdraft fee, according to the CFPB.

Four. Sign up for low balance alerts

Your bank may offer low balance alerts by email or text message. These alerts will notify you when your balance drops below a certain limit, which you can dictate.

5. Open a checking account with no overdraft fees

Some banks offer reviewing accounts They don’t charge overdraft fees and other banks have eliminated them. Capital One, Ally, Discover, Chime, Axos and Aspiration all offer accounts with no overdraft fees. Also, some banks are beginning to cap the amount of the fee, such as Bank of America, which will lower its fee from $35 to $10 beginning in May.

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