What are overdraft fees? And how can you avoid them?
Aug. 31, 2021
5 min read
What we'll cover
What sets overdraft fees apart from non-sufficient funds fees
Causes of overdraft fees and how they can add up
Four things you can do to protect yourself from overdraft fees
Let’s say you’re eyeing a $500 couch, but you only have $400 in your checking account. What happens when you swipe your debit card? You may still be able to make the purchase. But there’s a catch: You could incur an overdraft fee.
What is an overdraft fee?
If you attempt to spend more money than you have in your account — whether by using your debit card, writing a check or making an ACH (Automated Clearing House) payment— you’ll be charged an overdraft fee. To get your account back on track, you’ll have to pay back the negative balance, plus the extra charge. The average overdraft fee costs about $33, which can add up quickly, especially if you overdraw your account frequently.
What's the difference between overdraft fees and non-sufficient funds (NSF) fees?
If you try to use more money than you have in your account, you could be charged an overdraft fee or a non-sufficient funds fee. Both are an extra charge for sending your account below $0, but they are slightly different:
Overdraft fees allow you to continue paying bills and making purchases, even after your account balance reaches $0. When a bank charges an overdraft fee, this means they have allowed you to withdraw or spend more money than you had available in your account, resulting in a negative balance.
Non-sufficient funds fees occur when your bank declines to pay the transaction. In this case, your account could go into the negative due to fees, but your payment will be declined. For example, if you write a check or schedule an ACH without enough funds to cover the payment, it will be returned unpaid and you will be responsible for the NSF (aka bouncing a check). The recipient of the NSF check can also be charged a fee for the deposit being returned. If this check was written to a merchant, they may elect to pass that fee onto you.
How overdraft fees happen
Many scenarios can trigger an overdraft fee. Anytime you make a transaction (like buying groceries or paying an online bill) without enough money in your account and the bank allows the transaction to process, you’re left with a negative balance. Automatic bill payments, while convenient, can make it easier to overdraft your account if you’re not checking your balance regularly. For example, you might have a bill that’s paid on the same day each month but you recently bought an expensive flight using your debit card, and your account balance is lower than usual. When your automatic bill payment is processed, your bank may allow the transaction go through, but your account balance dips into negative territory and you could be hit with an overdraft fee.
How overdrafts can impact your financial standing
The more overdrafts you have, the more fees you will incur, up to a limit that’s determined by your bank. If your account ends up with a negative balance and remains negative for too long, some banks might levy a negative balance fee for each day your account is below $0.
Failing to pay back your debt in a timely matter (according to your account agreement with your bank) could result in the outstanding debt being sent to a collection agency. This will negatively affect your credit score, and even if you pay the money back, the delinquency will be on your credit report for the next seven years and could affect whether you qualify for loans or impact your ability to open accounts with other financial institutions.
You have options for safeguarding your account against overdrafting:
1. Track your balance
Banking online, like with Ally Bank, makes it easy to keep track of your balance. With 24/7 account access, you can bank anywhere, anytime, and on any device.
2. Sign up for alerts
Set up automatic alerts to notify you when your account dips under a certain balance. This way, you’ll know when to transfer more money into your account or take a break from using your debit card or making ATM (automated teller machine) withdrawals.
3. Opt-in to overdraft protection
Overdraft coverage lets you link your checking account with another account (like a savings account) so that when your account balance goes below $0, funds from the linked account will be used to cover the outstanding balance and you won’t have to incur an overdraft fee. However, some banks may charge for this service or offer overdraft protection as a loan product and may have other fees associated with it.
4. Automate your deposits
Set up recurring deposits to keep a consistent flow of money in your account.
With diligence and planning, you can do your best to avoid pesky (not to mention costly) overdraft fees. But if you want to guarantee you’ll never pay another overdraft fee, consider choosing a bank that’s done away with them for good.