What is an overdraft fee and how do you avoid them?

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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.

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.

Overdraft fee example

If you are covered by your bank’s automatic overdraft service, the bank will 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.

Part of that negative balance is the amount of the payment the bank paid on your behalf. Essentially the bank loaned you the money, and it will expect to get the money back. The rest is an overdraft fee the bank charged for covering the payment.

Suppose you have $50 in your account, but use your debit card, make an online payment or write a check on that account for $75. You are $25 short, but the bank would loan you the $25 and the payment would clear. Now assume your bank charges you a $30 overdraft fee. The $25 overdraft plus the $30 fee would give you a negative 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 $33.47, according to Bankrate’s 2020 checking account and ATM fee study. That can add up to a significant amount if you frequently overdraft your account.

Here’s a sample of the overdraft fees charged by some popular financial institutions:

Financial institution Overdraft fee
Wells Fargo $35
Bank of America $35
Capital One $35
Chase $34
USAA $29

Meanwhile, Ally Bank announced in early June it would eliminate overdraft fees on all accounts.

How to avoid overdraft fees

Overdraft fees are pretty easy to avoid if you take some basic precautions. Here are a few things you can do to avoid overdraft fees.

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. You can opt out of automatic overdrafts to avoid the fees altogether.

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.

2. Use an account that doesn’t charge you

Some accounts don’t charge overdraft fees. For example, SpotMe, a service from Chime, gives you the ability to overdraft your account by up to $200 without an overdraft fee.

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 have your bank send automatic notifications any time your account balance drops to $250, $500 or whatever amount keeps you comfortably away from an unexpected overdraft based on your spending habits. When you get the alert, you can decide to stop spending or deposit more 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 overdraw on your behalf by automatically loaning you the money and making the payment. With overdraft protection, the bank will transfer money from one of your other accounts to cover an overdrawn amount.

For example, if you overdraw your checking account but have overdraft protection set up with a savings account, the bank would automatically move money from your savings account to your checking account. The bank may charge you for this service, however.

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 will monitor your linked accounts and automatically message your bank to pursue a refund if you are charged an overdraft fee, for example.

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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
Senior editorial director
Reviewed by
Professor of finance, Creighton University