How To Avoid Overdraft Fees: A Complete Guide

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An overdraft occurs when you write a check or initiate a debit card purchase, and your account doesn’t have enough money to cover the transaction. The bank will cover the difference to process the transaction and charge an overdraft fee. The average overdraft fee is $35.

Banks charge this fee because of the revenue it generates. According to the Consumer Financial Protection Bureau, overdraft fees cost consumers about $5 billion annually. Also, the banks charge this overdraft fee to protect themselves against the negative balance in your account. 

How To Avoid Overdraft Fees: 5 Strategic Approaches

Here are five ways to avoid overdraft fees: 

1. Actively Monitor Your Account 

A proactive measure is to actively monitor your account. Regularly check your balance. You can use a mobile app or the computer.

You can also set up low-balance alerts to help monitor your account. For example, you could request a notification when your account balance falls to $100. If you receive that alert, you’ll know to be careful about your transactions until your account is replenished.

2. Use Your Bank’s Protection Tools 

Most banks have an overdraft protection program that allows you to opt in for one-time debit card purchases and ATM withdrawals. 

You can also link your checking account to a savings account or line of credit. If your primary checking account doesn’t have enough funds, it will automatically draw from your savings account or line of credit. The fees associated with this type of transfer are typically lower than an overdraft fee. 

3. Take Control of Your Spending 

Having financial discipline can help with your spending. One approach is to have a clear grasp of your budget. This can help avoid overdrawing your account, because you’ll know exactly how much you have available to spend. You Need a Budget (YNAB) is one helpful budgeting tool that helps you keep track of every penny, which helps avoid accidentally overspending.

Checks don’t always have predictable clearing times, so one way to avoid overdraft fees is to use peer-to-peer payment apps like Zelle, Venmo, PayPal or CashApp since these often clear funds immediately or instantly. 

4. Automate Your Finances 

Instead of manually transferring funds to your savings account on a random basis, consider setting up an automated transfer from your checking account to your savings account. Choose an amount that won’t put you at risk of an overdraft. 

In addition to protecting you from an overdraft, automating your savings allows you to build up a brighter financial future one transfer at a time.

5. Switch to a More Forgiving Account 

If you consistently pay overdraft fees, you may want to consider switching to a bank that doesn’t charge one.

Another option is to use prepaid debit cards to pay for purchases. Since a prepaid debit card isn’t tied to an account, there will not be a risk of an overdraft fee. Your transaction will likely be declined if there are not enough funds on the prepaid debit card.  

What To Do If You’ve Been Charged an Overdraft Fee 

Don’t panic if you’ve been charged an overdraft fee. You can do the following:

Step 1. Deposit Funds Immediately

If you deposit funds, it prevents further fees on subsequent transactions and account closure. You can deposit funds on the bank’s app or via mobile banking. 

Step 2. Contact Your Bank

It’s best to contact a representative over the phone or in person to let them know an overdraft fee has been charged. Explain the situation and be polite as the customer service representative asks a question. If you have a longstanding history with the bank and this is your first overdraft fee, ask for a refund. 

Step 3: Understand the Consequences

You want to bring your account into the positive as soon as possible. If you fail to do so, your account could be closed. It could also negatively impact your credit score, especially if your account is sent to collections. This negative history could also appear on your ChexSystems Report, which is the credit bureau equivalent for checking and savings accounts. 

Take Charge of Your Finances and Avoid Overdraft Fees

If you want to avoid overdraft fees, you need to implement strategies like account alerts, regular monitoring of your accounts and opting in for overdraft protection.

You need to engage in proactive management of your finances. By taking preventive measures, you not only avoid paying fees, but also take control of your finances. 

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