An overdraft fee occurs when you don’t have enough money in your account to cover your transactions.
An overdraft fee can increase the cost of your purchase and cause more financial strain if you’re already strapped for cash.
The key is to avoid them, but as you know… life happens, and sometimes, we can’t help but go over our bank account balances.
- Banks charge overdraft fees when you spend more than your bank account balance
- You can pay as much as $35 for an overdraft fee
- Overdraft fees occur daily
- There are several ways to avoid overdraft fees, including overdraft protection
What is an Overdraft Fee?
If you withdraw more money than is in your bank account, the bank charges an overdraft fee.
Banks charge this fee because they lend the money to you to cover your spending. Banks only charge the fee if you don’t cover the amount you went over before the end of the business day because they pay the transaction.
Typically, to incur an overdraft fee, your bank must allow overdrafts. Some bank accounts simply decline the transaction if there isn’t enough money in the account. While this may be embarrassing, it saves you money in the end.
Why Would You Pay An Overdraft Fee?
If your bank allows overdrafts (not all do), you might incur a fee if you use your debit card for a purchase for more than your bank balance. You can also incur overdraft fees if you write a check for more than the balance of your account.
So not only must you repay the amount you went over your bank balance, but you must also pay the bank’s fee. The bank automatically withdraws the funds from your balance when you deposit new funds.
Unfortunately, this could create an endless battle if you overdraft again because you have to pay your bills and may require some type of debt relief assistance to end the cycle.
Are Overdraft Fees Charged Daily?
Most banks continue to charge overdraft fees daily for each day your account balance remains less than the amount spent.
Fortunately, many banks have a maximum number of overdraft fees they’ll charge per day, but it can be high, typically up to five overdraft fees daily.
How Much is an Overdraft Fee?
Overdraft fees have risen significantly since 1998 but have slowly decreased in the past two years. From 1998 – 2021, they rose from $21.57 to $33.47 per overdraft.
Today, the average is $26.61, which is still a hefty charge for spending money you don’t have, and some banks charge as much as $35 per overdraft.
According to the Consumer Financial Protection Bureau (CFPB), overdraft spending decreased by $1.5 billion for the fourth quarter of 2022 compared to the fourth quarter of 2019. This averages to $150 less annually per household in overdraft fees.
In some cases, the overdraft fee can be more than the purchase.
Always ensure you have enough money in your account to cover the purchase to avoid these hefty fees and putting yourself further into debt.
An Example of an Overdraft Fee
Here’s a quick example of what an overdraft fee might look like.
You have $100 in your account, but make a purchase for $125. Your bank allows overdrafts, so they allow the debit card purchase for $125, lending you the $25 to cover the purchase. The bank then charges $30 for the overdraft.
This increases your purchase price to $155 if you deposit money by the next business day.
Let’s say you are two days away from payday, though. You’d incur an overdraft fee for two days, so the $125 purchase cost an extra $60 for a total of $185.
This all happened because your account was -$25 for the purchase that exceeded your bank balance.
5 Ways to Avoid Overdraft Fees
The good news is there are ways to avoid overdraft fees; here’s how…
Decline Overdraft Coverage
Banks provide the option for overdraft coverage, but you don’t have to take it. When you open your account, you can decline the option to overdraft.
As we said, this means your purchases will be declined if you don’t have enough money, but you’ll avoid getting into too much debt by making purchases you cannot afford.
Use Customized Bank Alerts
Most banks offer customized alerts, letting you know when your bank balance is low. You can choose the threshold for them to alert you. If you receive the notice, you know to either add more money to your account, if possible or avoid spending so you don’t incur overdraft charges.
Link Another Account
If you have another account at the bank, such as a savings account, you can link it for ‘overdraft protection.’ This service allows you to overdraft but without the fees. The bank will transfer the money from your linked bank account to cover the overage so you avoid an overdraft fee.
Consider Banks with No Overdraft Fees
It’s not a good idea to get into the habit of going over your account balance, but knowing you have protection can help in emergencies. Some banks don’t charge overdraft fees. Again, you shouldn’t get into the habit of spending more than you have, but it’s nice to know it exists in emergencies.
Call the Bank
If you accidentally overdraft your account, and it isn’t a regular habit, you may be able to get a one-time waiver. Ask your bank if they can waive the fee, and then figure out the best way to avoid them moving forward since this is usually a one-time opportunity.
Final Thoughts On Overdraft Fees
Banks charge overdraft fees to help you in a time of need, but they can add up quickly, putting you further into debt.
It’s best to set up your account so overdrafts aren’t allowed or put other supports in place, such as a linked external account or customized alerts, so you’re aware when you are close to your account balance.
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