Costly Mistakes: How Overdraft Fees Work (And What You Can Do to Avoid Them)

There’s nothing more deflating than checking your balance only to find out you’ve overdrafted your account. It’s not only the fact that your money management skills need improvement that cuts deep but also the fee the bank charges you for making the mistake in the first place.

Depending on how quickly you react, overdraft fees can continue to add up until you remedy the situation by funding your account. This can make you feel you’re personally being targeted for a simple mistake, but you’re not alone. According to a 2018 report released by the Center for Responsible Lending that analyzed Federal Deposit Insurance Corporation (FDIC) data, banks collected more than $11.45 billion in overdraft fees in 2017.

You’re reading that right. $11.45 billion.

While this is in part due to abusive overdraft fee practices, understanding exactly what overdraft fees are and how to avoid them can be the difference between keeping your money in your pocket or becoming a statistic. Here’s all you need to know about overdraft fees.

What is an overdraft fee?

An overdraft fee is charged when your available bank account balance isn’t enough to cover a payment or withdrawal. If the transaction isn’t immediately declined because of insufficient funds, your bank may cover the transaction with an overdraft protection service. While you’ll be able to make that purchase or withdrawal, your bank will charge a fee for covering the cost for you.

Overdraft fees are typically reserved for checking accounts, though savings accounts can also be overdrawn. According to Chime®, an account that delivers its members a nearly fee-free experience, the average overdraft fee is $35 and you can expect a maximum of four to six overdraft fees per day. You can see how they quickly add up.

How much do overdraft fees cost?

While overdraft fees are usually discussed as being just one fee, there are actually several types of bank overdraft fees, each with their own associated costs.

Overdraft fee

The overdraft fee is the most common fee imposed on even the best checking accounts. This fee is levied on your account each time the bank processes a transaction that exceeds the available funds in your account. As mentioned above, the average overdraft fee is $35, but they can range from $9 to $38 for each transaction.

Each bank sets their own policies when it comes to how much it will charge you as an overdraft fee, as well as the number of overdraft fees your account will be subject to in a day.

Overdraft protection fee

Some of the best banks offer an opt-in overdraft protection program that will cover you should a transaction exceed your available balance. This works by linking your checking account to another account, which will act as a safeguard against overdrafts, transferring money should your checking account come up short.

Banks often charge a monthly service fee to use this feature, and this fee can be steep. Bank of America, for instance, imposes an overdraft protection transfer fee of $12 per transfer.

Extended overdraft fee

On top of a fee for each transaction that your available balance can’t cover, many banks will charge an overdrawn balance fee if you leave an account in the red for a certain number of days — usually five to seven days.

Some banks charge this fee once every five to seven days, while others may charge it every day until you add enough funds to put your balance back over zero. Extended overdraft fees can be as much as $36 each time, but will vary from bank to bank. PNC Bank, for instance, charges $7 each day your account remains overdrawn for a period of five or more days.

NSF fee

Similar to an overdraft fee, a non-sufficient funds (NSF) fee might be imposed on your account if your bank rejects a transaction because your account balance isn’t enough to cover the transaction.

If you have overdraft protection, the bank might process the transaction, since you have a secondary means for paying for it. If you don’t have overdraft protection, however, the bank might reject the transaction and an NSF fee will be charged. This amount can vary depending on the bank.

4 tips to stop overdrafting

1. Avoid spending more than you have available: This might be the most obvious solution, but it requires that you manage your money properly. That means knowing how much you’re bringing in each month versus how much you’re spending. Creating a budget is the best way to ensure you aren’t slapped with a fee for accidentally overspending.
   
2. Consider opting into overdraft protection, but be careful: Overdraft protection can help you avoid costly overdraft fees, but consider how much it costs to use this feature. Additionally, overdraft protection means your linking your checking account to another account, such as a savings account. If you use this feature to cover a transaction, be mindful of the account you’re withdrawing from to cover the costs.
   
3. Open an account with a fee-free bank: Another way to avoid overdraft fees altogether is to bank with institutions that either don’t charge or waive these types of fees. Even if your bank avoids these fees, practicing proper money management is still ideal.
   
4. Sign-up for mobile or online alerts: Some banks will offer a feature you can sign-up for that will alert you when your available balance drops below a certain amount. This gives you the opportunity to fund your account appropriately before it’s too late.

Bank accounts that do not charge overdraft fees

If you choose to bank with an institution that doesn’t impose overdraft fees, it’s one less thing you’ll have to worry about. Many online and mobile banks have gone in this direction, and, in addition to not charging overdraft fees, many have scrapped most other banking fees as well.

Chime®

Chime is a financial services app that doesn’t make money off of you by charging monthly fees.¹ <p class="">Chime is a financial technology company, not a bank. Banking services and debit card provided by The Bancorp Bank, N.A. or Stride Bank, N.A.; Members FDIC.&nbsp;<br></p> In fact, Chime doesn’t charge overdraft, minimum balance, transfer, foreign transaction, or monthly service fees. Chime makes a little bit each time you swipe your Chime debit card, paid by Visa.² <p>There’s no fee for the Chime Savings Account. Cash withdrawal and Third-party fees may apply to Chime Checking Accounts. You must have a Chime Checking Account to open a Chime Savings Account.</p>

There are no branches, as Chime is fully mobile, but it comes with a debit card and an optional Automatic Savings Account. Did I mention you can also get your paycheck early? Chime members who set up direct deposit are eligible to receive their paychecks up to two days early.³ <p> Early access to direct deposit funds depends on the timing of the submission of the payment file from the payer. We generally make these funds available on the day the payment file is received, which may be up to 2 days earlier than the scheduled payment date.</p>

Minimum deposit to open account	None
Overdraft fee	None up to $200 for eligible members4 <p>SpotMe® for Credit Builder is an optional, no interest/no fee overdraft line of credit tied to the Secured Deposit Account; SpotMe on Debit is an optional, no fee service attached to your Chime Checking Account (individually or collectively, “SpotMe”). Eligibility for SpotMe requires $200 or more in qualifying direct deposits to your Chime Checking Account each month. Qualifying members will be allowed to overdraw their Chime Checking Account and/or their Secured Deposit Account up to $20 in total, but may be later eligible for a higher combined limit of up to $200 or more based on member’s Chime account history, direct deposit frequency and amount, spending activity and other risk-based factors. Your SpotMe Limit will be displayed to you within the Chime mobile app. You will receive notice of any changes to your SpotMe Limit. Your SpotMe Limit may change at any time, at Chime or its banking partners’ discretion. Although there are no overdraft fees, there may be out-of-network or third party fees associated with ATM transactions or OTC cash withdrawal fees at retailers. SpotMe won't cover non card transactions, including ACH transfers, Pay Anyone transfers, or Chime Checkbook transactions. <a href="https://www.chime.com/policies/">SpotMe on Credit Builder Terms and Conditions</a>.</p>
ATM access	Yes, up to $500 of ATM withdrawals per day ($2.50 fee per transaction). Transactions at MoneyPass ATMs are free.
Transactions per month	No limit on number of transactions ($2,500 maximum that can be spent on the card per day)
FDIC insured	Yes

SoFi Checking and Savings

When you open a SoFi Checking and Savings account, you’re getting a cash management account that combines the features of a checking and savings account — the high APY of an online savings account without the transaction limitations savings accounts are typically subject to.

There are no account fees, service charges, maintenance fees, or overdraft fees.⁵ <p>We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at <a href="http://sofi.com/legal/banking-fees/">sofi.com/legal/banking-fees/</a></p>

Minimum deposit to open account	None
Overdraft fee	None6 <p>Overdraft Coverage is limited to $50 on debit card purchases only and is an account benefit available to customers with direct deposits of $1,000 or more during the current 30-day Evaluation Period as determined by SoFi Bank, N.A. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Members with a prior history of non-repayment of negative balances are ineligible for Overdraft Coverage.</p>
ATM access	Yes, plus unlimited reimbursement for ATM fees7 <p>We’ve partnered with Allpoint to provide you with ATM access at any of the 55,000+ ATMs within the Allpoint network. You will not be charged a fee when using an in-network ATM, however, third-party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.</p>
Transactions per month	Unlimited number of transactions (Usually set at $1,100 per day limit in peer-to-peer transfers, 12 point-of-sale transactions per day, and generally capped at $1,000 in ATM withdrawals daily)
FDIC insured	Yes8 <p><b>SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at <a href="http://sofi.com/banking/fdic/terms">SoFi.com/banking/fdic/terms</a> See list of participating banks at <a href="http://sofi.com/banking/fdic/receivingbanks">SoFi.com/banking/fdic/receivingbanks</a></b></p>

Citizen Access Online Savings Account

Citizens Access is an online-only bank that provides an online savings account with a high APY and low fees. Deposits can easily be made using your smartphone, but there’s no option for depositing cash, so you’re limited to transferring funds from an outside account or depositing a check.

The minimum balance requirements are higher than many other online banks, but the bank’s no-fee structure might be worth it to you.

Minimum deposit to open account	$5,000
Overdraft fee	None
ATM access	None
Transactions per month	Up to six transactions per month
FDIC insured	Yes

Common questions about overdraft fees

Bottom line

Overdraft fees suck. While you’re responsible for ensuring that you’re properly managing your money, mistakes do happen. If this is the case and your bank is unwilling to work with you, it might be time to look for a new bank.

Keep track of your finances, check your accounts often, and consider banking with institutions that have their customers’ best interests in mind.