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What is an overdraft fee and how can you avoid it?

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What is an overdraft fee?

An overdraft fee is what a bank charges you any time you withdraw more money from your account than what you have in it.

When someone’s account is overdrawn, the bank temporarily lends money to cover the total expense. The consumer is responsible for paying back both the overdrawn amount and the overdraft fee, which can sometimes be even more than the original amount charged.

Overdraft fees can be a significant and unnecessary expense, particularly if you have to pay them often. However, there are easy actions you can take to avoid them and ways you can negotiate to get them waived if you are charged.

Over the past couple of years, many banks have also eliminated or greatly reduced their overdraft fees.

Overdraft fee example

If you are covered by your bank’s automatic overdraft service, the bank may cover the charge and it will still get paid. Your account balance will dip below zero and you will have a negative balance representing the amount you now owe to the bank.

Suppose you have $50 in your account, but you need $75 to pay for a sudden expense, such as a car repair. You are $25 short, but the bank loans you that $25 and the payment clears. Let’s say the bank charges a $30 overdraft fee. That $30 fee plus the $25 overdraft would leave you with an account balance of -$55.

How much an overdraft fee costs

Overdraft fees have risen over the past 20 years. They vary from bank to bank, with an average overdraft fee of $33.58, according to Bankrate’s 2021 checking account and ATM fee study. That can add up to a significant amount if you frequently overdraft your account.

Those who are more financially disadvantaged are more vulnerable to incurring overdraft fees. A vast majority of overdrafts (70 percent) are charged to consumers with low average account balances, between $237 and $439 on average, according to the Consumer Financial Protection Bureau.

The exact fee charged for an overdraft varies per bank, but here are the fees of some popular financial institutions:

FINANCIAL INSTITUTION OVERDRAFT FEE
Wells Fargo $35
Bank of America $10
Chase $34
USAA $29
Capital One $0
Ally Bank $0

How to avoid overdraft fees

Overdraft fees are pretty easy to avoid if you take some basic precautions.

1. Opt out of automatic overdrafts

While overdrafts are meant to help you avoid embarrassing and inconvenient unpaid payments, you don’t have to accept the service. When you open a new account, part of the paperwork you fill out addresses whether you want to take advantage of this service.

If you opt out of overdraft coverage, your bank won’t cover you if you overdraw your account and will return any payments that you can’t make as unpaid — but you won’t be charged the overdraft fee.

2. Use an account that doesn’t charge you

Capital One, Ally Bank and Alliant Credit Union are just a few of the financial institutions that stopped charging overdraft fees on their accounts. You can always consider switching to a new bank to save more money in the long run.

3. Sign up for bank alerts

A simple way to help yourself avoid unexpected overdrafts and save fees is to set up an alert to notify you when your account balance falls below a certain amount.

For example, you could set up automatic notifications any time your account balance drops to $250; then you’ll know to be careful with spending no more than that balance until you’ve deposited additional money into the account.

4. Overdraft protection

It may sound similar, but overdraft protection is different from automatic overdrafts. With automatic overdrafts, your bank covers any overdraft on your behalf by automatically loaning you the money and making the payment. With overdraft protection, the bank will transfer money from another linked account to cover an overdrawn amount.

Note that the linked account generally has to be with the same institution. Some banks will still charge a fee for using overdraft protection.

5. Keep a cushion balance

Try keeping a little extra in your account to cover those forgotten or unexpected charges.

“One mistake consumers often make in this area is forgetting about recurring transactions like subscriptions or automatic monthly payments,” says debt expert Jackie Beck. “One way to avoid overdraft fees is to make sure you keep a cushion in your checking account above and beyond what you normally spend each month.”

How to get banks to waive an overdraft fee

If you are charged an overdraft fee, that doesn’t always mean you are stuck paying it. It doesn’t hurt to negotiate to try to have the fee reimbursed. Here are a couple of steps you can try.

Call the bank

There’s no guarantee it will work, but you can always call the bank and politely ask the financial institution to remove the charge from your account.

“If it’s your first offense, your bank will often work with you,” says Chris Abrams, founder of Abrams Insurance Solutions.

Your odds of success go up if you infrequently overdraw your account, remain polite and are an otherwise good bank customer. Don’t expect an easy yes though. Be prepared to explain why the bank should waive the fee for you.

Try an app

You can also use an app that will help negotiate overdraft fee refunds for you. Cushion, for example, automatically monitors your bank accounts and negotiates with the bank to pursue a refund if you’re charged an overdraft fee. Just know that this process can take up to 90 days.

— Bankrate’s René Bennett contributed to an update of this story.

Written by
Brandon Renfro, CFP
Contributing writer
Brandon Renfro, CFP, is a contributing writer for Bankrate. Brandon writes about banking and personal finance advice.
Edited by
Vice president
Reviewed by
Professor of finance, Creighton University