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What Is an Overdraft Fee?

It’s time to pay your electric bill. You send in the payment but then you get a notification that you overdrew your account. Now you have to pay an overdraft fee. This is a common fee and if you don’t pay it right away, it can get expensive. (That’s the last thing you want if you’ve just gone through the work to find a high-interest savings account.) Read on to learn more about overdraft fees and how you can avoid them.

What Is an Overdraft Fee?

An overdraft occurs when you make a transaction that brings the balance of your bank account below zero. At that point, your bank account is considered overdrawn and you will have to pay what’s known as an overdraft fee.

The amount of the overdraft fee varies from bank to bank. On average the fee is about $35, but it could be anywhere from $10 to $40. Most banks charge an overdraft fee but there are some, particularly online banks, that don’t. If you’re considering an online bank, here’s a rundown of online vs. traditional banks.

Overdrafts can get expensive so it’s important to pay the fee as quickly as possible. In addition to the overdraft fee, your bank will charge you interest on the amount that you’ve overdrawn. The interest rate varies over time and between institutions, but it can be very high (over 20%). The reason banks charge interest is because they view an overdraft as a short-term loan. Many banks also charge a fee for every day that your account is overdrawn. This fee could be as much as $5 or even $10.

Overdraft Fees at Popular Banks
Bank Overdraft Fee
Bank of America $35
Chase $34
Citibank $34
PNC Bank $36
Santander $35
TD Bank $35
U.S. Bank $36
Wells Fargo $35

How an Overdraft Happens

When you attempt to overdraft your account, one of two things will happen. The first possibility is that your bank will return or decline the payment on the spot. In that case, you’re bank could charge you a non-sufficient funds (NSF) fee. You might also have to pay a fee from the vendor that you visited. A bank’s NSF fee is often the same as its overdraft fee. Because of old Federal Reserve rules, a bank can charge you high interest rates (without necessarily disclosing them beforehand) if it charges the same fee for an overdraft as it would for NSF transactions. The result is that banks are less likely to charge the NSF fee and more likely to go with the next option.

The second thing that could happen when you attempt to overdraft your account is that your bank automatically covers the cost of the transaction and then charges you an overdraft fee. This could happen with checks, with ATM withdrawals or at the point of sale for debit card transactions. As mentioned earlier, the amount that you overdraw is treated like a short-term loan and you will have to pay interest on it. The interest will stop accruing as soon as you pay the amount you owe.

How to Get an Overdraft Fee Waived

Let’s say you accidentally overdraft your account. Now your bank wants you to pay a fee. In some cases, you can call the bank and get the fee waived. Simply call customer service or your nearest branch and tell them that you would like them to waive the fee. They will likely say that they cannot do that. In that case, remind them that you are a loyal customer by mentioning how many years you’ve been a customer with the bank and how infrequently (if ever) you’ve overdrawn your account. Ask if there is anything they can do to help you get the fee waived.

This won’t work in every case but in many cases, it will. Just remain polite and be persistent because they will undoubtedly tell you that it isn’t possible to waive the fee. Then you should be careful to avoid future overdraft fees. One great way to that is to opt out of automatic overdrafts.

Opting Out of Automatic Overdrafts

What Is an Overdraft Fee?

It is possible to prevent your bank from using the automatic overdraft. (That’s when the bank automatically covers your overdraft with a short-term loan.) You just need to opt out.

If you’re opening a checking account, your bank will probably notify you that the account is set up to use an automatic overdraft. Your bank will also give you the option to opt out. Many banks are not very open with the fact that you can opt out.

If you want to opt out for an account you already have, call someone at your bank to tell them you want to opt out. This is a simple process but it may take a day or two for the change to take effect.

When you opt out of automatic overdrafts, every time you make a transaction that would overdraw your account, your bank will deny the transaction. Your bank would then charge you its NSF fee. As mentioned earlier, this fee is probably the same as the overdraft fee. The difference is that this is a one-time fee. Your bank won’t be lending you money so you won’t have to pay any interest. It’s good to remember that you may also have to pay a fee to a vendor if your transaction is denied.

What if you don’t want to pay overdraft penalties, but you also don’t want to have your debit card denied at stores? That brings us to overdraft protection.

Overdraft Protection

Overdraft protection is the best way for most people to avoid paying overdraft fees. With overdraft protection, you link your checking account to another account that you have with the same bank. When you overdraw your checking account, your bank will automatically transfer funds from your linked account to cover the transaction. This way you avoid paying an overdraft fee and you avoid the embarrassment of having your transaction denied.

Overdraft protection isn’t free. Every time you overdraw and your bank has to transfer funds, you will pay a fee. The fee varies from bank to bank but is usually about $15. That’s about half of an overdraft fee.

If you want to use overdraft protection, you will need to sign up with your bank. This requires you to sign a contract with your bank saying that you authorize them to transfer funds from another account every time you overdraw your checking account. Of course, you will need to have another account (like a savings account) with the same bank in order to sign up for overdraft protection.

The Bottom Line

What Is an Overdraft Fee?

An overdraft occurs when you make a transaction that brings your account balance to a negative amount. This could happen at an ATM, with a check or with your debit card. Unless you opted out when you opened your account, your bank will probably cover the cost of the transaction with a short-term loan and then charge you an overdraft fee. Things can get expensive quickly if you overdraw your account. Luckily, banks offer overdraft protection, which uses money from another one of your accounts instead of letting the bank give you a loan. Overdraft protection is the best option for avoiding overdraft fees. It requires you to sign a contract with your bank though, so make sure to set it up before you actually need it!

Tips to Help You Avoid Bank Fees

  • Banks are known for their fees. The best way to avoid these fees is to know what they are and what triggers them. Here’s an article with six sneaky bank fees and how to avoid them.
  • What if you’re still in the process of choosing a bank? The overdraft fee is one good thing to know about when you open an account with a new bank. You should also look for other things like FDIC protection. Here are some things to look for when choosing a bank.

Photo credit: ©iStock.com/eclipse_images, ©iStock.com/kokouu, ©iStock.com/pixelfit

Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society of American Business Editors and Writers and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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