What Is an Overdraft Fee and How Can You Avoid It?
Try to spend money that you don’t have in your checking account and you’ll end up slapped with overdraft fees. It might be an honest mistake, but that mistake could still cost $35 or more if you attempt to make a payment that causes your checking account balance to drop below zero. For frequent overdrafts, that could add up to hundreds of dollars each year.
Fortunately, you might be able to get the fee waived, and you have several options for avoiding overdraft fees altogether.
Whether a nonsufficient funds fee was the result of an innocent oversight or poor timing on an automatic payment, you can save yourself considerable cash if you learn how to avoid overdraft fees or get them waived. Overdraft protection is another option that helps you avoid the embarrassment of having your debit card declined at checkout, but it can push you deeper into debt.
Here’s a look at at some overdraft basics, including the reasons why banks charge overdraft fees, whether there are limits on these fees and what can happen if you don’t bring your account back to a positive balance.
An overdraft fee is also known as a nonsufficient funds fee or insufficient funds fee, and banks impose it whenever a transaction for more than your account balance hits your account. Overdraft fees typically cost around $34 but vary by bank or credit union. Federal laws don’t impose a limit, so your bank is limited only by its own policies unless there are state regulations in place. Expect to pay big for overdraft fees at Wells Fargo, Chase and most other banks.
Your bank is not required to notify you when you overdraw your account. Unless you realize it happened, you could rack up additional overdraft fees as other transactions come in.
Overdraft fees provide banks with billions of dollars in revenue. Letting you overdraw your account is like giving you a high-interest short-term loan, which adds to the bank’s revenue.
Although overdraft fees are only charged once for a particular transaction, you can rack up multiple fees for multiple transactions in one day. Check with your bank to see if it has a daily limit on the number of transactions for which you can be charged overdraft fees.
Your bank might have some patience when you overdraw your account, but eventually, it’ll close the account unless you deposit the funds. The bank typically notifies you about the problem before it takes action, but expect your account to be closed and for the bank to start collection action within about 60 days.
Overdraft fees have no direct effect on your credit, but they can cause ripple effects that harm your credit score. For example, unless you pay the fees, your bank might hire a collection agency that adds the debt to your credit reports. Your ChexSystems report also includes information on overdrafts, which could affect your ability to open other bank accounts in the future.
Overdraft fees typically range from about $10 to $36, so just one overdraft per month could cost you $120 to $432 per year. The more aware you are of that cost and your options for how to avoid overdraft fees, the better you can manage your money. Consider your spending habits to determine which method of avoiding overdraft fees is best for you, or try a combination of methods to avoid fees.
Here are five steps you can take to avoid overdraft fees:
1. Opt Out of Overdraft Coverage
Banks are forbidden from charging overdraft fees on ATM withdrawals and most debit card purchases unless you opt in. Opting in means you give your bank permission to let certain transactions go through even if they will overdraw your account.
By default, the bank will decline transactions that will overdraw your account so that you can only incur overdraft fees on checks and certain electronic transactions and membership renewals. But you might have opted in without realizing it.
Opting out of overdraft coverage can save you a lot of grief. Without overdraft coverage, any time you attempt to spend more money than there is in your account, the transaction will be declined, sparing you the overdraft fee. It might not seem like much, but overdrawing a small amount results in a fee that’s equivalent to taking out a short-term loan with an astronomical interest rate.
2. Turn Off Automatic Payments
Automatic payments make it easy for you to forget about your monthly bills. In the event that these payments are making it hard for you to gauge how much money you have to spend, turn off automatic withdrawals. Being able to control when you make payments helps you be more mindful of the money going in and out of your account.
3. Set Up Direct Deposit
Having your paychecks automatically deposited can reduce the likelihood that you’ll overdraw your account, especially if you live paycheck to paycheck. Checks take longer to clear when you deposit them the old-fashioned way, so you might not have the money in your account in time to cover any pending charges.
4. Link Your Checking and Savings Accounts
Assuming your savings account balance is high enough, ask your bank to automatically transfer funds from savings to your checking account as a simple method of overdraft protection. Although most banks charge a fee for this service, it’s typically less than the overdraft fee.
5. Check Your Account Balance
Of course, the best way to avoid an overdraft fee is to know how much money you have in your account. To do that, you should check your account balance regularly so you know how to manage your budget. Just be sure that your bank doesn’t charge you for a balance check, as some banks impose a fee for this service.
Expect to pay some hefty fees in return for opting into your bank’s overdraft protection program. But you might pay less in checking account fees, and some banks’ overdraft programs have begun waiving bank overdraft fees — not to be confused with monthly maintenance fees — for transactions that overdraw your account balance by $5 or less.
Here’s the cost of overdraft fees and overdraft protection at Wells Fargo, Bank of America, Chase and other major banks:
|Bank||Overdraft Fee||Overdraft Protection Fee|
|Bank of America, Member FDIC||$35||$12/transfer|
Not many depositors stop to contest overdraft fees because they’re usually the ones at fault. But even when the blame can be placed squarely on your shoulders, you might be able to convince your bank to waive the fees. These tips will help you do it:
1. Remain Polite and Patient
Don’t lose your head even if your request to have an overdraft fee waived is initially shot down. Regardless of the barriers your bank representative might put up to deny your request for a waiver, press on with kindness. No one wants to deal with an irate customer who’s yelling — talk it out with the associate and remain pleasant throughout the entire exchange.
2. Make a Straightforward Request
Typically, a simple phone call will suffice to get the fee waived. You don’t need to give a long and grueling explanation from the onset. Your initial request can be as simple as:
“Hi, I just noticed an overdraft fee on my account. I’m calling to have it waived.”
The representative will likely put you on hold to either review your account or seek approval from a supervisor to proceed. With a positive approach, you’ll likely see equally positive results.
3. Focus On What a Great Customer You Are
First offenders and customers who haven’t had an overdraft in quite some time can play up their good customer report card. Explain that it was a one-off mishap and refer to your sterling record. Having your paycheck direct deposited can strengthen your case when you request a good-faith waiver.
4. Leverage Your Loyalty
Loyalty can play a major role in your ability to get overdraft fees waived.
Since the Bank Transfer Day movement in 2011 — when tens of thousands of people pledged to switch from banks to credit unions to protest high bank fees — financial institutions have been wary of losing their most loyal customers because of their fees. Some already waive fees for customers who maintain certain balances or who have multiple accounts. But it never hurts to ask for a waiver even if you don’t fall within your bank’s specific guidelines.
When talking to your bank, note how many years you’ve been a customer with the institution, and to prove your point, add in the number of active accounts — such as checking accounts, savings accounts, investments, loans and mortgages — you have with the bank.
A response similar to this might help turn the tables in your favor:
“I’ve been a loyal customer for 12 years and opened a number of accounts with this bank because I was always treated right. I really would like this overdraft fee waived. What can you do to help me with this?”
5. Escalate the Phone Call
The first customer service representative you speak to might not have the authority to waive the fee, so ask this individual to escalate your call if you’re initially unsuccessful. Be prepared to repeat the prior strategies, including a straightforward request and an emphasis on your loyalty, when your call is transferred.
6. Make an Appearance
In the event your phone call doesn’t do the trick, visit your branch in person and speak with an associate about how to get your overdraft fee waived. It’s a lot harder to say no to a customer in person, and many banks view their branches as ways to facilitate positive customer experiences.
By being patient and sincere and pointing to your loyalty as a customer, an associate might be hard-pressed to say no to a waiver.
You have the power to prevent your financial institution from getting more of your money in fees — if you learn as much as you can about your bank’s overdraft rules and how your accounts work. Find the best way to control spending, and you’ll also reduce how much you spend on these outrageous bank fees.
In the process of managing your accounts carefully, the rapport you build with your financial institution will benefit you and your wallet in the long run.
Information is accurate as of Aug. 18, 2022.
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Editorial Note: This content is not provided by Chase. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by Chase.