What Is an Overdraft Fee and How to Avoid Them

Money
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If you’ve ever used your debit card to purchase something for $25 and then found out when you checked your bank statement that it actually cost you $59 because you incurred a $35 overdraft fee, you’re not alone. 

Many people struggle with overdraft fees, which are charged when you try to spend more money than you have available in your checking account and you’ve opted in to overdraft protection.

You might think that overdraft protection means you’re protected from overdraft fees, but that’s not how it works. When you opt in to a bank’s overdraft protection service, the bank allows you to complete a transaction that exceeds your account balance — for a fee. An overdraft fee. 

Confusing, right? According to survey research by The Pew Charitable Trusts, 70% of those who overdraft don’t understand how to avoid overdraft fees. 

Let’s take a look at what overdraft fees are, what overdraft protection really is, and how you can avoid overdraft fees altogether. 

What is an overdraft fee? 

An overdraft happens when you don’t have enough available funds in your checking account to cover a payment or withdrawal and your bank or credit union pays for the transaction anyway. Essentially what is happening is the bank is making a mini loan to your account in the amount of the overdraft. 

For this service, the bank charges a fee known as an overdraft fee. The next time a deposit is made into your account, the amount you are overdrawn plus the overdraft fee will be immediately deducted from your account. 

How much do overdraft fees cost? 

Overdraft fees typically cost between $30 and $35 per transaction, and they can add up if you’re not careful. 

Consumers pay roughly $17 billion annually in overdraft fees and non sufficient funds fees combined, according to the Consumer Financial Protection Bureau.

But these fees are unnecessary. Learning how to avoid them can help you save money. 

How to avoid overdraft fees

Fortunately, there are some simple ways to avoid overdraft fees. 

1. Opt out of overdraft protection

Under federal regulations, a bank must obtain your consent before covering debit card purchases and ATM withdrawals and charging overdraft fees — a service known as overdraft protection. When you open a new checking or savings account, you have the option to opt in to overdraft protection. 

If you don’t opt in and you try to make a purchase or withdrawal that you can’t afford, then the bank will simply decline your debit card transaction at the register or your withdrawal at the ATM. 

Keep in mind that there are some instances in which you can still incur overdraft fees, even if you don’t opt in to overdraft protection, such as if you write a check that overdraws your account or when recurring bills are automatically deducted from your account.

Most important to remember is that banks can’t charge you for overdrafts on ATM or point-of-sale debit card transactions unless you have opted in, so steer clear of bounce coverage and courtesy overdraft protection programs.

2. Watch your balance

Another way to protect yourself from overdraft fees is by tracking your expenses. Sign up for online banking, watch your balance, and keep track of how much money you have available. That way you’ll always know how much you can spend. 

3. Set up low-balance alerts

Another way to be aware of when your balance is low is to sign up to receive email or text alerts when your bank account dips below a certain threshold. If you get a low-balance alert, you can transfer or deposit more money into your account or cancel the payment.

4. Link your checking account to a savings account 

If you link your checking account to your savings account and you overdraw on your checking account, your bank will transfer funds from your savings to your checking to cover the difference. There might be a small fee to do this, but it’s cheaper than an overdraft fee. 

Keep in mind this only works if you have sufficient funds in your savings account. 

5. Change to a bank that doesn’t have overdraft fees

Not all banks charge hefty overdraft fees. Some banks don’t have overdraft fees. Varo, for example, offers No Fee Overdraft up to $50 to eligible customers for purchases or withdrawals made with the Varo Visa® Debit Card.

Overdraft fees are not only costly. They’re also unnecessary. Use these strategies to help avoid overdraft fees and manage your money better.

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