Overdraft fees are penalties banks charge their customers for spending more funds than they have available in their account. Overdraft fees are fixed, meaning that you’d pay the same amount no matter how much you overstep your balance.
How Do Overdraft Fees Work?
An overdraft fee can occur with ATM withdrawals, debit card transactions, personal checks, and automatic bill payments. Most of the time, users are not even aware they are overdrawing their account, but they need to pay the overdraft fee all the same.
For instance, you have $10 in your account, and use your card to purchase a $15 shirt. That means that the bank will take $5 from your account and charge you an overdraft fee as soon as you make your next deposit.
How Much Do Bank Charge in Overdraft Fees?
Overdraft fees are dependent on the financial institution you bank with, but the national average cost is $35. That amount is flat, and you pay it even if you overdraw your account by just a few dollars.
Keep in mind that a bank can charge an overdraft fee every time you overdraw your account, and that can happen several times a day, with costs stacking up to hundreds of dollars.
Some banks can also charge a sustained overdraft fee when the user doesn’t add more funds to the account, and it stays overdrawn for several days. This fee can vary depending on the bank and continue to accrue every day until the account is no longer in negative balance.
Most banks have placed limits on how many times they can charge overdraft fees each day, but these costs can still get high.
Why Do Banks Charge Overdraft Fees?
Banks allow overdrawing your account so you don’t come into a situation where your check bounces. That way, banks are protecting their customers from paying merchant fees by letting them overdraw their account.
However, there is no merchant fee with ATM withdrawals and debit cards. Not having sufficient funds would mean you aren’t able to pay for something or withdraw money.
In fact, debit cards are the most common way of payment that gets people to overdraw their accounts. And the overdraft amount is the lowest compared to other payment methods ($24 compared to $100 for ATM withdrawals, personal checks, and automated bill payments).
You still pay the same fee whether you overdraw your account by $24 or $100, which may seem a little disproportionate. when you keep in mind that debit transactions are the preferred payment method of the most vulnerable customers.
What Are Overdraft Protection Programs?
Banks can decline transactions if there are not enough funds available in the checking account. You can enroll in an overdraft protection program depending on whether you opt for coverage or not.
By choosing an opt-out option, you won’t be able to overdraw your account and therefore won’t have to worry about these fees. People who picked an opt-out choice paid $450 less on annual penalties compared to users who allowed overdrawing.
People think overdraft fees negatively affects their credit score, but you shouldn’t worry about it. The only way it can affect your credit score is if you leave your account overdrawn for so long that the bank hires a collection agency to settle your debt.
How to Avoid Overdraft Fees?
Reports show that banks collected $11.45 billion in overdraft fees in 2017.
A way to avoid overdraft fees is by preventing overdrawing. You can do that by calling your bank and making sure you opt-out of overdraft protection.
If you opt-in on overdraft protection, there are a few things you can do to stay away from overdraft fees.
The main thing you can do is to monitor your account balance and all nearby costs. If your balance gets too low, and you know there are some checks and automatic bill payments coming through, hold off your other transactions until you can put more money into your account.
Another thing you can do is to connect your checking account and your savings account. That way, your bank can transfer funds from one to the other if you overstep your balance.