All About the Overdraft Fee

What is an Overdraft Fee?

Have you ever been charged a hefty fee from your bank because you took more money out of your checking account than you had? That is an overdraft fee, and overdraft fees can come at a huge cost over time. Let us look at the specifics of overdraft fees so you can hopefully avoid receiving them.

Overdraft Fees are on the Decline … For Some

2024 estimates show that average bank overdraft fees are almost $35 per transaction. And many banks charge a daily fee for each day the overdraft amount is not paid back. So even if you were to overdraw your account by a penny, you would likely be charged an expensive overdraft fee.

Luckily, many financial institutions have realized overdraft fees are a problem, so they are starting to offer short-term installment loans to their customers to help them avoid large fees. An installment loan still comes with fees, but it allows the consumer to borrow more money that can be paid back over time at a potentially lower interest rate.

Also, at most financial institutions you can connect your checking account to a credit card, so if you were to accidentally overdraw on your account, it would not charge you an overdraft fee. That can be a beneficial tool, however, if it is overused you will start having insufficient funds on your credit card and could ultimately build up bad credit score if you are unable to pay it back on time.

Banks Need Permission to Impose an Overdraft Fee

You may not realize it, but your bank or credit union is not allowed to overdraft your account without your permission. When you sign up for a checking account you have to fill out various forms and agreements, and one of those documents asks if you would like to opt-in or out of overdraft fee protection.

So, what is overdraft protection? The Overdraft Protection Act of 2013 requires financial institutions to give consumers a notice explaining overdraft policies, and account holders must opt-in to allow their bank to overdraft their accounts. That means your bank or credit union can only pay overdraft amounts, and subsequently charge you the relevant fee, for debit card transactions or ATM withdrawals if you have previously opted in to allow this option. If you have not opted in and there is not enough money in your account to cover the payment or withdrawal, then your transaction will simply be denied.

Before this rule, accounts were automatically enrolled in overdraft protection and consumers had to opt-out if they did not want it. While the regulation was a positive step toward safeguarding consumers, half of those people whose accounts went into overdraft did not remember signing an opt-in agreement, according to the Pew Charitable Trusts, which has evaluated overdraft fees and their effects since 2013.

Banks and Credit Unions Benefit From Imposing an Overdraft Fee

According to the Pew Charitable Trusts, banks that charge overdraft fees on ATM withdrawals and debit card transactions bring in 400% more overdraft revenue than banks that do not. So, your bank might be financially motivated to charge you overdraft fees when least expected. This is why it is important to always do your research and check to see what sort of fees your bank will charge you before opening an account with them.

How to Get an Overdraft Fee Refund?

When it comes to overdraft fees you can usually opt-out of them, so you never can withdraw more from your account than you have. That is the best way to avoid ever needing to request a refund, but if you missed opting out you can usually still receive a refund.

The best way to request a refund is by contacting your bank and explaining the situation. If this is the first time you have overdrawn your account and you have been a good customer for an extended length of time, they will likely be more lenient and help you get refunded. You will still have to pay them back the excess funds you took out, but the overdraft fee is something they likely can refund you for.

Overdraft Protection: How to Avoid Overdraft Fees

Monitor your account balance

Knowing your account balance can help you stick to a budget accordingly before your account is overdrawn. Many banking and budgeting apps can provide quick glances or snapshots of your daily balance and what is safe to spend. Most banks will also let you opt-in to receive text notifications or email alerts if your balance slips below a certain amount.

Opt-out of overdrafts

You can also opt-in or opt-out of overdraft protection from your bank at any time. For example, if you accidentally opted into overdraft protection when you first opened your account you can work with your bank to have them opt you out of the protection. You should still be very thorough in reading all forms before signing up for an account, so you do not accidentally consent to something you do not agree with.

Understand Your Options

You do not have to rely on bank overdraft protection to meet your financial needs. Many alternatives exist that can provide quick access to cash between paychecks, such as payday loans. Payday loans can be a good solution for short-term financial problems—and often at a lower cost than multiple overdraft fees.

Overdraft Fee FAQs

When it comes to overdraft fees, one of the most commonly asked questions is how do NSF fees (or non-sufficient fund fees) relate? They are similar in the fact that they are charged based on a consumer withdrawing more money than they have in their account. However, with an overdraft fee, you can take the excess amount of money out and spend it. And with an NSF fee, you are not able to take the excess money out and are then charged a fee for attempting to take more funds out than you have available.

So why do some financial institutions implement NSF fees vs. overdraft fees? Typically, an NSF fee is going to be charged when someone tries to cash a check and the person who wrote that check has insufficient funds. That is why it is incredibly important to not cash a check unless you are certain the person who wrote it for you has the funds available.

What would my overdraft fee be?

Overdraft fees vary across financial institutions, with some banks having fees as high as $40, and some banks with no overdraft fees at all. Based on that, we have gathered some example overdraft fees from prominent banks so you can get an idea of what most places charge.

• Chase Overdraft Fee: $34 (as of March 2024)
• Wells Fargo Overdraft Fee: $35 (as of March 2024)
• Bank of America Overdraft Fee: $35 (as of March 2024)
• PNC Overdraft Fee: $36 (as of March 2024)
• US Bank Overdraft Fee: $36 (as of March 2024)
• Navy Federal Credit Union Overdraft Fee: $20 (as of March 2024)
  

What are the specific consequences of repeated overdrafts beyond just the fees?

There are lots of negatives regarding overdraft fees such as high costs and negative impacts to your credit score, but something a lot of people do not consider is it can cause you to lose your banking privileges. Financial institutions do not have the obligation to take a person on as a client, and if the bank is losing too much money on someone, they have the right to close their account with them. 

What are some alternatives to overdraft protection for managing short-term financial needs?

Many banks look at overdraft fees as short-term and high-interest loans, so rather than falling into the cycle of paying more money than needed, do your research ahead of time. Payday loans and short-term installment loans offer customers a quick and stress-free way to receive cash and pay it back in a manageable amount of time. And if you are going through an unexpected crisis there are emergency installment loans to help with that.

What are the long-term consequences of relying on overdraft protection as a financial safety net?

If you have decided to opt into overdraft protection or accidentally opted into it, you should understand the impacts of using it. If you are opted into it but never overdraw on your account, then there is no implication. However, if you are opted in and overdrawing on your account regularly there are lots of issues you can experience over time.

You can end up with a bad credit score, which can hurt you in many other aspects of life (buying a house, a car, etc.). It can also cause issues with your overall financial health and stability. You have to weigh the pros and cons when it comes to opting into overdraft protection and always make sure that you are making the best financial decision for your future. Beefing up your financial literacy can be a big benefit to your future.

Find out if an installment loan from Check `n Go is right for you.