How to Avoid Costly Overdraft Fees

Overdraft fees can strike fear into the heart of many consumers. They add up and can compound your financial stress dramatically. Just one unfortunately timed overdraft fee can kick off a cascading sequence of additional overdrafts, causing multiple overdraft fees and sending your account dropping into the negative zone.

That’s why it pays—literally and figuratively—to do anything you can to avoid these onerous fees. In this article we explain why and cover how to avoid overdraft fees, through five actionable tips that you can put into practice today.

What are overdraft fees?

Banks and other financial institutions charge overdraft fees when a bank account doesn’t have enough funds on deposit to cover a check or other type of debit against the account. The bank will honor the transaction and pay the funds specified to the presenting party (i.e., the person or institution to whom the account holder wrote the check or authorized a debit card transaction), while simultaneously assessing an overdraft charge or fee against the consumer’s account in addition to the transaction amount.

For example, let’s say you write a check to your child’s babysitter for $40, but you only have $35 in that checking account. When the babysitter deposits the check or cashes it at your bank, the bank may choose to honor the check, giving the babysitter their $40 and making your account $5 overdrawn (i.e., $5 in the negative).

However, if your bank assesses an overdraft fee for that transaction, you’re actually in an even worse position. Standard overdraft practice is to charge an average fee of about $35, so now you’re overdrawn $40. In other words, you were only short $5, but now you owe the bank $40 to bring your account back up to a $0 balance.

Is an overdraft fee the same thing as a non-sufficient funds fee?

Overdraft fees typically are assessed in situations where the bank honors the underlying transaction, regardless of the shortage. These are generally assessed when that charge takes your account below zero and where you’ve opted in to overdraft coverage for ATM and debit card transactions.

A non-sufficient funds (or NSF) fee is a bit different. In this situation, the bank rejects the underlying transaction and declines to pay it. However, it assesses a similar amount against your account.

In most cases, a bank’s overdraft fee and NSF fee will be set at the same amount, which is typically around $35. Some financial institutions set their fees at lower amounts. These institutions are typically classified as credit unions

Why do banks charge overdraft fees?

There’s a reason why so many financial institutions charge hefty overdraft and NSF fees: They’re a major source of revenue for banks.

According to the Consumer Financial Protection Bureau (CFPB), in 2019 alone, overdraft and NSF fees were responsible for over $15 billion in additional revenue, especially for larger banks. This amount far exceeded other sources of revenue for financial institutions, such as ATM fees. Previous research from the Consumer Financial Protection Bureau established that under 9% of bank accounts belonging to consumers were assessed fees for 10 or more overdrafts annually.

What’s the current state of regulation of overdraft fees?

In light of this data, the CFPB announced in December 2021 that it would increase oversight and regulatory control over the use of overdraft fees as a significant revenue source. The CFPB Director Rohit Chopra pointed out “exploitative” nature of the fees actually charged, noting that the actual cost to a bank of rejecting a transaction or processing an overdraft was minimal.

Chopra then stated the agency’s intention to focus its investigative and regulatory oversight efforts on banks that relied heavily on overdraft fees as a source of profit. Any banks found to be in violation of the law would be formally charged. Additionally, possible further regulations would be explored and pursued. Finally, the CFPB would look for ways to make it easier for consumers to switch banks and avoid heavy overdraft fees.

How to avoid overdraft fees

Whether you’re dealing with a single occurrence or multiple overdraft fees, the best way to deal with overdraft fees is to work hard to avoid them in the first place. Good money management skills can help you avoid incurring overdraft fees. In addition, you can implement the following five specific strategies.

Pay with cash

One popular cash management strategy followed by many consumers is to withdraw cash from the bank account and use it to pay for budgeted items. Many people divide the cash into labeled envelopes for each budgeted item—one for groceries, one for gas, and so on. Utilizing this strategy will reduce or eliminate your need to rely on debit card and check payments, which in turn reduces the likelihood of math errors that lead to overdrafts.

Use direct deposit

It’s all too common for life’s unanticipated events and surprises to force you to delay all sorts of errands, including a trip to the bank. So it’s understandable if you have to put off depositing a paper check from time to time. That can mean that you’ll have to wait for a day or more to have access to your money. Unfortunately, it can also mean that your risk of incurring an overdraft rises.

Having your income deposited directly into your checking account by your employer will help eliminate delays, thus making sure your anticipated funds are credited to the account promptly. That will help you manage those funds more accurately and avoid unnecessary charges for overdrafts.

Create a cushion in your checking account

Another effective way to reduce or eliminate overdraft fees is to add a buffer or cushion amount to your checking account, then pretend that it isn’t there. Adding an extra $50 or $100 to your account, either at once or over time, will be sufficient to cover most accidental overdrafts due to simple math errors.

Balance your checking account regularly

Knowing exactly what you have in your account, and how many transactions are still outstanding against it, is the single best way to avoid overdrawing your account accidentally. To know how much money is in your account, you’ll need to balance your account regularly, weekly or monthly (though the more frequently you do so, the more clarity you’ll have).

To balance your account against your account register, note down any interest accrued or fees assessed. Next, check each item on your statement against your register and make sure you’ve noted each charge against your account. Verify your deposits made, and then list any transactions that haven’t yet posted to your account. Your statement balance plus any deposits and interest minus all debits not listed on the statement should equal to the amount in your register.

Link another account for overdraft protection

For additional protection against overdraft fees, ask your financial institution about linking your checking account to another account, such as your savings account. That way, if your checking account becomes overdrawn, the bank can cover the overdraft with funds from your savings account and you’ll avoid being assessed that onerous overdraft fee. Your bank may charge a fee for this service, so know what that is. However, it’s usually less than the overdraft fee.

Banks and financial institutions may also offer credit-driven overdraft protection programs. These services are offered to consumers with good credit and are structured on an as-needed credit basis to help you avoid fees when your account balance becomes too low to cover a pending debit card transaction or check.

How long do you have to pay your overdraft fee?

Your bank will set a deadline for you to bring your account back to a positive status. In most cases, you’ll have either five business days or seven calendar days in which to replenish your account and bring it back above a zero balance. You may be able to negotiate a slightly longer period of time in which to pay. Such a request is more likely to be granted if this is your first overdraft or.

Can overdraft fees hurt your credit score?

Generally speaking, financial institutions do not report overdrafts to credit reporting agencies. As a result, there’s usually no impact to your credit rating as long as the overdraft is cleared within a reasonably short period of time.

However, if you fail to cover the overdraft by depositing additional funds, the bank may close your account and then report that action to ChexSystems. It may also show up on your credit report as a collection account, which may also lower your credit score accordingly.

Is it possible to get an overdraft fee refunded?

In some cases, it is possible to persuade a bank to refund an overdraft fee. You’ll generally have more luck in this request if you have only incurred one fee, if you haven’t had any prior overdrafts, and if your account has a good record or history. Most likely, this will be a one-time courtesy offered by the bank, so don’t bet on it being offered a second time. Instead, use the above tips to eliminate overdraft fees altogether.

About the author

John Boitnott is a longtime digital media consultant and journalist who covers technology trends, startups, entrepreneurship and personal finance for Inc, Entrepreneur, Business Insider, USA Today and other major publications.

About the reviewer

Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.