When you don’t have enough money in your financial account to cover a transaction but your institution honors it anyway, you’ve been said to have an overdraft. An overdraft allows you to continue using funds in your account even when it has a negative balance, but you’re required to replace the money, and usually pay a fee.
An overdraft occurs when a transaction exceeds your available balance, and your bank or credit union covers the cost. With an overdraft, the financial institution still expects you to make good on the amount it fronted you. On top of that, you’re often charged a fee related to an overdraft, making the transaction even more expensive.
Let’s take a look at how overdrafts,,Overdraft Fee,Overdraft Protection works, and the different ways your bank or credit union can charge you when your balance falls below zero.
1)How Does an Overdraft Work?
An overdraft can be triggered by any action that results in a negative account balance. This might include:
- An automatic payment deducted from your account when you don’t have enough money to cover the cost
- A check you wrote being deposited and deducted from your account later than expected, and you don’t have the available funds to cover your next purchase
- Making a debit card purchase in person or online and it is approved, even though there isn’t enough money in your account to cover it
When you make a purchase that brings your account balance below zero, banks decide whether to decline the purchase or pay it for you, overdrawing your account.
Most of the time, a bank or credit union will base the overdraft on your available balance the amount of money in your account that you can spend, withdraw, or cover transactions. Sometimes, your listed balance is different from your available balance, so be sure to check your available balance and verify what the bank actually believes you can spend. Additionally, know that banks might order transactions in different ways, reducing your available balance. For example, a debit might be taken out before a credit is applied, which can result in an overdraft, even if you think you have sufficient funds in your bank account.
Depending on the bank, overdrafts will be handled in various ways. There isn’t one way to handle an overdraft. Additionally, there are different fees associated with each type of overdraft transaction and action.
2)Mechanics of Overdraft Protection
If you don’t have the funds in your checking account to cover a transaction, the bank will cover it for you in certain cases and charge you an overdraft fee.
Say you need to spend $100 with your debit card but don’t have $100 in your checking account, or maybe you have sufficient funds in your account but they’re not yet available for spending.
If you opted in to overdraft protection, the bank would still approve the debit purchase, allowing you to complete your purchase. However, your account would at that point be overdrawn that is, you’d have a negative account balance. The bank would assess an overdraft charge and request that you deposit funds immediately to cover the $100. If you didn’t opt in, however, the bank would decline the transaction and wouldn’t charge you the overdraft fee.
The opt-in provision of the overdraft protection service only applies to one-time debit and ATM transactions.If you write a check or make a recurring payment that would overdraw your account, your bank may still pay for it on your behalf and assess an overdraft fee even if you didn’t opt in. But it may also choose not to pay for it, in which case you won’t get hit with an overdraft charge. However, you may still have to pay a non-sufficient funds (NSF) fee that is comparable to the overdraft fee.
You typically won’t pay this fee when a debit card transaction is declined. If a bank returns a check unpaid, you may also have to pay a returned-check fee.
Overdraft protection is an agreement between you and your bank to cover overdrafts on a checking account, which often includes a fee. If you choose overdraft protection when you set up an account with your bank, you’re usually offered a few different options:
- Standard overdraft practice: This is typically the default, covering certain transactions such as automatic payments and recurring debit purchases, including a gym membership or a monthly subscription service.
- Overdraft protection: In some cases, a bank or credit union might allow you to link your savings account to your checking account as a form of backup. When an overdraft occurs, the money is automatically transferred from the linked account and deposited in the transaction account. Depending on the institution, this service might be free. For example, Chase offers this form of protection for free, whereas Wells Fargo charges a fee.
- Debit card coverage: If you want your debit transactions to go through, even if they aren’t recurring bills, you can ask about this service. Usually, though, there is a fee associated with each transaction.
Your bank may use varying terms when referring to types of overdraft choices, so it’s important to carefully read each description. Additionally, you can decline overdraft protection and save money on overdraft fees. However, if a payment is returned due to insufficient funds, you may still be on the hook for a returned payment fee.
- An overdraft can allow transactions to go through, even if you don’t have available funds in your account.
- Banks offer different types of overdraft protection that can allow you to continue to pay bills, even if you don’t have money in your account, often for a fee.
- Overdraft fees can be expensive and increase the cost of a transaction.
- Even if you don’t have overdraft protection, a transaction might still go through and result in a fee.
- Review your bank’s policies to understand when and how it handles overdrafts.
Pros and Cons of Overdraft Protection
The main benefit of overdraft protection is that it helps you pay emergency expenses even if you’re short on cash. You can also avoid the penalties or fees that would have applied had you made a late payment because of temporary money troubles. As another benefit, you might avoid bounced check fees from retailers, assuming you pay by check and the bank allows it to clear. The party receiving the payment won’t be aware that you were running low on funds when you paid them. This helps you avoid embarrassment, especially if you sent payment to a friend or business partner.
That said, overdraft protection isn’t cheap, and the per-transaction fee can make it especially costly if you use it regularly. You might even be charged multiple overdraft charges in a single day.The likely reason you incurred the fee is that you didn’t have enough money available, and with overdraft fees, you’ll have even less. Also, the bank may revoke the service if the banks feels as though you’re using it irresponsibly.
To make matters worse, repeated overdrafts can show up as negative items in your ChexSystems report, which can keep you from getting approved for a bank account.
Finally, if you use overdraft protection too often, it may allow you to get into bad habits that end up costing a lot over your lifetime. Depending on overdraft protection may be a sign that you need to learn to better manage your cash flow.
Cost of Overdraft Protection
Banks don’t typically offer overdraft protection for free. They charge fees partly to keep you from abusing the service, and because it creates a source of revenue for the bank.
Different banks impose different overdraft fees; however, a standard per transaction fee of around $35 applies.Banks may also place different limits on the dollar amount that their overdraft protection service covers.Make sure you understand the potential charges before opting in to overdraft protection.
If you have a line of credit attached to your checking account as a backup funding source, you may incur interest costs since the overdraft would be considered a “loan.” Known as an overdraft line of credit, this option usually requires you to pay a fee when the credit line is tapped, but it’s usually less expensive than paying a fee for each overdraft that hits your account.
As you may have guessed, the best way to avoid overdraft charges is not to opt in to the service, which can often prevent overdraft charges. But if you intend to opt in to an overdraft protection program, shop different banks to reduce your costs. Get the answers to a few key questions to find the bank with the most affordable overdraft protection plan:
- What is the fee for overdrafts? With this figure in mind, consider the frequency and amount of overdrafts that you experience to determine whether the service would cost you less at one bank than another.
- Can you link your checking account to a backup funding source that will be used before the overdraft feature? If you attach a savings account to pull cash from, for example, you may be able to avoid overdraft fees and interest costs.
- Would an overdraft line of credit be more advantageous? Ask your banker what fee will apply when you tap the line of credit and what interest rate you’ll pay on money you borrow.
The most effective way to minimize overdraft protection costs while you’re opted in is to reduce the number of overdrafts you make. Aside from doing some basic financial tracking using a check register, also keep tabs on your bank account balances by using online banking, or banking apps on your mobile phone, to verify the funds in your checking account and any uncleared checks before you spend.
If you know you’ll be in a cash crunch in the near future, address the situation proactively. When your budget says you’ll be low on cash, look for ways to stretch payment due dates a few extra days out. For example, call the party that you owe payment to, such as a credit card company, student loan issuer, or utility company, mention your current cash shortage, and ask if they can wait a few days for your payment. It’s also wise to ask if they can waive late fees since you called ahead.
Legality of Overdraft Fees
In July 2010, federal law changed how banks and credit unions can charge overdraft fees. Again, banks used to automatically add overdraft protection to your account, and you often had to opt-out of this “protection.”
As a result, consumers paid fees to banks for simple mistakes in their checking account. The common example was a $38 latte $3 for the coffee and $35 for the overdraft charge.
Banks were required to turn the overdraft feature off and only offer the feature to customers who opt in, but customers still pay overdraft fees in some cases without opting in. Two situations can likely cause an unexpected overdraft charge:
- The bank is breaking the law and charging customers illegally, which is unlikely but not unheard of.
- The purchase is not one of the “one-time” payments covered by the overdraft law4
You can argue whether or not the law should have more broadly defined overdrafts. But understanding how overdraft protection works under the current law can keep you from incurring overdraft charges for transactions that aren’t covered.
3)What Are Overdraft Fees?
Your bank charges an overdraft fee when it pays for a transaction even though you don’t have enough money in your account to cover the transaction. Overdrafts can happen if you write a check or swipe your debit card for more than the amount you have available in your checking account. Having multiple transactions hit your account on the same day can also put you at risk of incurring multiple overdraft fees.
The median overdraft fee of the top 50 banks by market share is $34, according to the Consumer Financial Protection Bureau.
In some cases, the bank may return the transaction to the merchant and charge you a non-sufficient funds or insufficient funds fee instead of covering the purchase for you and charging an overdraft fee.
Fees vary according to bank or credit union. However, the median cost of an overdraft fee is $35 per incident, according to the Pew Center on the States. Additionally, even if you have overdraft protection that involves an automatic transfer, you might still incur a fee. Pew reports that it’s common to see a fee of about $10 for these transfers, although not every bank charges this fee.
Pay attention, too, because some banks and credit unions classify overdraft protection as a line of credit. If that’s the case, you may end up paying interest on the amount of the overdraft until you pay the amount advanced to you by your financial institution.
How Do Overdraft Fees Work?
Overdraft fees can be quite expensive, costing close to $40 each occurrence, depending on your bank. The fee doesn’t have to come as a surprise. Some banks let you enroll in alerts that will notify you by text, email, or mobile notification if your account is overdrawn. You may also spot the fee when you’re checking your transaction history online or reading through your billing statement. Your online account may note the transaction that triggered the overdraft fee.
Overdraft fees are charged per transaction, which means your bank could hit you with multiple fees on the same day if you have several transactions posted to your account after you’re overdrawn. Depending on the bank, you could end up with more than $200 in overdraft fees in a single day.
Your bank may limit the number of overdraft fees you’re charged in a single day, which keeps you from being charged an excessive amount of overdraft fees.
Opt-In Requirement for Overdraft Protection
In 2010, the Board of Governors of the Federal Reserve System adopted a rule requiring financial institutions to get your permission to provide overdraft protection on your account. Before that, you could be charged for the service whether you wanted it or not. In many cases, you had to opt out of, or decline, the service to avoid the associated fee.3 Now, instead of turning off overdraft protection, you must opt in, or accept, overdraft protection for the bank to lend you the money to cover overdrafts when you’re short on funds.
The idea behind the 2010 rule was to prevent the “$39 latte,” which could happen if your bank charged a $35 overdraft fee on a small debit card purchase even if you were only a few cents short.5 Most people, understandably, would prefer to find a different way to pay in such a scenario, or just forgo the transaction. The opt-in requirement means you won’t incur overdraft fees unless you’ve explicitly agreed to them, but it doesn’t apply to all transactions.
Transactions Incurring Overdraft Fees
The ability to opt out of overdraft protection only applies to certain types of transactions. Transactions that aren’t covered under the federal overdraft opt-in regulations can cause problems.
In some cases, the transaction will be processed even if your account is opted out of overdraft protection and doesn’t have the funds available. When that happens, you’ll still incur an overdraft charge, and you’ll need to come up with the money to bring your account balance back above zero.
In other cases, your bank will reject the transaction, but you’ll still be charged what is known as a non-sufficient funds (NSF) fee for insufficient funds.NSF fees are comparable to overdraft fees.
No Fees for One-Time Debit or ATM Transactions
When you make a purchase with your debit card or withdraw cash from an ATM, your bank will usually prevent the transaction if you’re out of money and won’t charge you overdraft fees if you turned off overdraft protection.6 You can pay for the expense using another method or skip it entirely. In addition, you generally won’t be charged NSF fees when your bank declines debit-based transactions.
Overdraft Fees for Recurring Payments
Automatic electronic payments aren’t covered by the opt-in regulations for overdraft protection. This means that when you sign up for these payments, your bank might process them even if your account is opted out of overdraft protection and doesn’t have enough money available. For example, you might incur an overdraft charge for a monthly membership fee billed to your debit card for insurance premiums deducted directly from your checking account every month via ACH.Alternatively, the bank can decide not to let the transaction clear, in which case you might still be on the hook to pay the NSF fee.
Overdraft Fees for Checks
Paper checks are still surprisingly common. Your bank’s online bill payment system might even be able to print and mail a check for you, which means you can make payments by check even if you don’t write the check yourself.Whether you write and send one the old fashioned way or let your bank handle it, you run the risk of bouncing a check.
Any one-off checks that aren’t regular monthly payments can be processed by your bank, resulting in a negative account balance and hefty fees. However, each bank handles overdraft fees for checks differently. If the bank lets the check clear, you will likely incur overdraft fees even if you turned off overdraft protection. If, in contrast, the bank returns the check unpaid, it can still charge you the NSF fee. Contact your bank and ask what specific policies are in place for your account.
Overdraft Fees by Bank
The majority of banks big and small charge overdraft fees, though the amount and maximum number of fees they charge per day varies.
|Bank||Overdraft Fee||Max Fees Per Day|
|Bank of America||$35 on transactions over $1||4|
|Citizens Bank||$37, and an additional $30 fee on the fifth, eighth, and 11th day an account remains overdrawn||7|
How To Get Overdraft Fees Refunded
If you’ve been charged an overdraft fee, you may be able to get it refunded with just a few steps as long as you’re not a repeat offender.
- Call Your Bank
Once you notice an overdraft fee has been charged, give your bank a call. You can find the number quickly on the back of your debit card or the bank’s website, or in your mobile app.
- Make Your Request
Let the bank know that you’d like to have the overdraft fee waived. You can say something like, “I noticed I was charged an overdraft fee on [date] and I’d like to have it removed.”
It may help to give the bank some background on what led to the overdraft. For instance, your pay was delayed, a bill was processed sooner than you expected, or you’ve been experiencing financial hardship.
- Use Your Bank History
If you’ve otherwise been a good bank customer and have avoided overdraft fees so far, bring this up. For instance, you can say, “I’ve been a good customer for several years and overdrafting is not common for me. Is there something you can do?”
- Be Polite
Remember, you’re asking the bank to do you a courtesy. Asking nicely goes a long way. Avoid getting angry, even if the customer service rep isn’t budging on waiving the fee.
for Avoiding Overdraft Fees
Banks may be less willing to waive your overdraft fee if you’ve made overspending a habit. There are some ways you can avoid overdraft transactions, saving yourself hundreds of dollars in fees and eliminating the stress of asking for fees to be waived.
- Deposit or transfer funds before the cutoff time: Depositing enough money to cover the pending transactions can prevent you from overdrafting your account.
- Look for a bank that doesn’t charge overdraft fees: They may still process overdraft transactions but won’t charge you a fee for it.
- Sign up for bank balance alerts: These alerts notify you if your account balance drops below a certain amount, which can let you know you need to make a deposit before that day’s deposit cutoff time.
- Sign up for overdraft protection. This feature transfers money from a linked bank account or credit card to prevent overdraft. Some banks still charge a fee for overdraft protection transfers, but this is typically lower than an overdraft fee.
Overdraft transfers from a credit card may be treated as a cash advance, which typically involves paying a cash advance fee and a higher interest rate than you would for purchases. Cash advance transactions don’t have a grace period for avoiding finance charges interest starts on the transaction date.
4)overdraft line of credit:
An overdraft line of credit is a loan attached to your checking account. If you run out of money and you’ve been approved by your bank for this type of add-on, the line of credit can cover expenses so that you don’t bounce checks, miss payments, or have your debit card denied. Some banks also allow you to access the line of credit if you need emergency cash.
Any money you use is provided as a standard loan from your bank, so you’ll pay interest on the amount you borrow. However, overdraft lines of credit are often less expensive than standard overdraft protection programs, which may charge around $35 for each rejected transaction that hits your account.Still, some banks charge you a fee for each transfer from your checking line of credit or for each day that a transfer is made from your line of credit to your checking account.
Understanding how a checking line of credit works and what your alternatives are allows you to cover unexpected expenses while avoiding the fees of a standard overdraft protection program.
How a Checking Line of Credit Works
Let’s say that you have no money in your checking account, and then several small charges hit your account: $5, $6, and $7. You’re now short by a total amount of $18. Let’s say that your bank charges three overdraft coverage fees of $35 each, one for each item. That’s $105 in fees to cover $18 in charges.
With a checking line of credit, you’d instead borrow the $18 against the overdraft line of credit. The bank would charge you interest on the loan at a rate comparable to credit cards, and possibly a transfer fee, such as $5 per item covered.
If you repay the loan within a few weeks from the time that your paycheck hits your checking account, the interest charges might range from less than a dollar to a few bucks. Thus, you’ll pay no more than $20 in fees and interest for covering the expense from the overdraft line of credit instead of $105 with the standard overdraft protection a substantial difference of $85.
An overdraft line of credit is distinct from and generally less expensive than a standard overdraft protection program.
Penalties Without a Checking Line of Credit
It’s always best to keep a cushion of cash in your checking account, but sometimes mistakes and surprises catch you off guard, and an overdraft line of credit provides a back-up plan for those situations. If your checking account runs dry, and you don’t have a line of credit linked to the account, the penalties will depend on the types of charges that hit your account and whether you have other overdraft protection set up for your account, such as standard overdraft protection.
- One-time debit card transactions: If you use your debit card for day-to-day shopping or ATM withdrawals, your bank might simply reject the transaction if your account doesn’t have sufficient funds to cover it and you never opted in to any kind of overdraft protection, such as an overdraft line of credit. You may not even be charged a non-sufficient funds (NSF) fee by your bank in that case, as banks generally don’t charge NSF fees for declined debit-based transactions.You can decide to use a different payment method or simply forgo the transaction. However, if you’ve opted in to some type of overdraft protection, you’ll use that service.
- Preauthorized payments: Recurring monthly bills that hit your account by ACH may still be processed by your bank, even if your checking account is empty. In those cases, you’ll likely be charged overdraft fees, even if you did not explicitly opt in to overdraft protection. If the ACH transaction is returned unpaid, you will pay NSF fees, which are comparable to the $35 per-transaction overdraft fee.
- Checks: If you write a check for more money than is available in your account, your bank may or may not allow the check to go through. Again, if you have standard overdraft protection, it will cover the check as long as the amount is within limits. If not, your bank may still pay the check and charge you for overdraft fees, or it may allow the check to bounce, which can result in NSF charges and other fees and headaches.
Even if you did not opt in to overdraft protection, your bank or credit union may still charge you for overdraft fees if it pays a check or facilitates a recurring electronic payment that overdraws your account.
Pitfalls of an Overdraft Line of Credit
Having a loan to your checking account is less expensive than standard overdraft protection, and it allows you to keep spending in emergencies.But it’s dangerous to depend too much on this form of overdraft protection for a few reasons:
- Interest charges: Overdraft lines of credit, while inexpensive, are not free. You’ll have to pay interest on the money that you borrow. If you only borrow for a day or two, the cost should be extremely low.
- Transfer fees: You might also have to pay a small fee every time you dip into the overdraft line of credit, so the more you use it, the more it’ll cost you.
- Annual fees: Some banks charge a modest yearly fee to keep the service on your account. However small these fees, you’ll pay more in fees than you have to if you use your checking line of credit over several years.
- Limits: There usually aren’t any strict limits on how many times you can use an overdraft line of credit, but your bank may impose fees if you exceed the approved credit limit and may even cut you off if you use your overdraft line of credit too often. In addition, there is usually a dollar limit on the line of credit to prevent you from borrowing too much.Depending on your credit and potential need, you may secure an overdraft line of credit for $500 or $1,000, although some banks offer lines with a credit limit of up to $10,000. If, however, your approved line of credit is insufficient to cover a transaction, it may not go through.
- Encourages overspending: Having a checking line of credit attached to your checking account is not unlike having a credit card; it can encourage you to spend money that you don’t necessarily have in your checking account. If you depend on it too much, you could wind up with an overdraft loan and interest charges that you can’t afford to repay.
Alternatives to a Checking Line of Credit
If your main concern with an overdraft line of credit is overspending with your debit card, simply opt-out of overdraft protection. Your bank will reject debit-based transactions, and you can find another way to pay.
You can also link your checking account to a credit card instead of a line of credit. You will still owe interest on the amount you borrow, but you can avoid the $35 per-transaction fee for standard overdraft protection.
If, however, you are seeking a viable alternative to a line of credit, your bank might also allow you to link your checking account to a savings account. Instead of borrowing the bank’s money, you’ll use your own cash from the savings account. The fee for a savings transfer is generally similar to that of a line of credit transfer. You can also set up your checking account so that your savings account gets used before you borrow from a line of credit.
If you feel that the fees at your bank are exorbitant, shop around for different bank accounts that may charge you less in fees for standard overdraft protection or NSF charges.
Getting an Overdraft Line of Credit
To sign up for an overdraft line of credit, contact your bank. Some banks will require you to fill out an application, but not all will impose application fees for a checking line of credit.
Be sure to ask about all associated fees and a list of alternatives, such as a savings account transfer. Once the checking line of credit is on your account, use it as rarely as possible to keep your overdraft loan at a manageable amount and your interest charges and transfer fees low.
If you have a line of credit linked to your checking account, it’s best to balance your account and sign up for low-balance alerts so that you know when you’re running low on funds.
Despite federal regulations for overdraft protection that keep you from forking over overdraft fees when you don’t opt in to the service, you may still incur overdraft fees for transactions that aren’t covered under the opt-in provision. Namely, there’s still a risk that you’ll incur overdraft or NSF charges for automatic payments and checks.
These fees, while relatively small, can add up over time and make it that much harder to cover your monthly expenses or grow your savings. Using the tips above whenever possible can help you avoid or at least minimize bank fees. To overcome the problematic spending behaviors that can lead to an overdrawn account, you’ll need to make deeper changes to your finances, including spending with your means and saving more.