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Even if you make every attempt to maintain a positive bank account balance, slip-ups and unexpected expenses can happen that cause you to go into the red. Maybe your paycheck doesn't fully clear before you go grocery shopping, or multiple automatic payments are authorized at the same time. If transactions take your account balance below zero, you could get hit with an overdraft fee. Here's what overdraft fees are and how they work.
How Overdraft Fees Work
Overdraft fees may occur when a payment is authorized and there's not enough funds in your bank account to fully cover the transaction.
Instead of declining the payment, your bank may hand over the money for the transaction and charge you a fee. If you have multiple overdrafts in one day, it's possible to get hit with multiple fees; however, there may be a limit to how many fees you can be charged per business day.
To rectify an overdraft situation, you'll have to add money to your bank account to cover the overdraft amount plus the fees your bank charged. Otherwise, the balance you owe will be subtracted from your next deposit. If you don't bring your balance above zero, the bank may close your account and transfer an unpaid balance to a collection agency.
Another form of overdraft protection that banks may offer is an automatic transfer from a linked account to cover a purchase if you don't have enough money in checking. For example, if you try to make a $200 purchase and there's only $150 in your checking account, the bank might pull money from savings or a credit card to ensure your account doesn't go into the red. This transfer service may also come with a fee, but it's often lower than the overdraft fee.
How Much Do Overdraft Fees Cost?
While fees can vary from one financial institution to the next, you can expect to pay around $35 per overdraft charge. Here's an overview of the overdraft fees for major financial institutions.
|Cost of Overdraft Fees at Major Financial Institutions|
|Bank of America||$35|
|Discover||$0 (payments are declined if there isn't enough money in the account)|
Do Overdraft Fees Hurt Your Credit?
Overdraft fees don't directly affect your credit or credit score. That's because banking history isn't reported to the three credit bureaus—Experian, TransUnion or Equifax. However, if you don't pay a negative balance on your bank account and the account gets sent to a collection agency, the collection account could appear on your credit report and hurt your score.
Checking account overdrafts can show up on your ChexSystems report, which is a report banks and credit unions use to assess your banking history. Financial institutions typically pull your ChexSystems report when deciding whether to approve you for a bank account.
Having negative records on this report, such as unsettled overdrafts, could make it harder to open a new bank account, which is why it's important to keep your account balances above zero.
To review your banking history, you can get one free ChexSystems report each year. If you discover unpaid account balances, try to pay them off as soon as possible. Once you do, you can ask the financial institution to remove the record from your ChexSystems report. Ultimately, though, removal is up to their discretion.
How to Avoid Overdraft Fees
Overdraft fees are expensive banking-related fees that you may be able to steer clear of by following these steps:
- Cover the negative balance quickly. Some banks give you a grace period during which time an overdraft fee isn't charged if you replace the balance within a business day.
- Opt out of overdraft protection. You could consider opting out of overdraft services. If you opt out, the bank may simply decline transactions when your account balance can't cover the charge instead of accepting the charge and adding a fee on top.
- Link to a savings account or credit card. Your financial institution may offer the option to automatically use another account to cover the charge if you don't have enough funds for a transaction. As mentioned, a fee may also be charged for this service, but it could be less than the overdraft fee.
- Keep close tabs on your bank account balance. Consider downloading a banking app to keep your balance at your fingertips around the clock. Your banking app may let you set up account alerts that give you a heads up when your balance is running low.
If you only rarely (or never) overdraw your bank account, the fees may not be a big consideration. If overdrafts are frequent, however, they can easily pile up and could put you in a difficult financial position. Not only that, your banking history and credit history could be affected when those balances go unpaid.
If you're worried that an unpaid account balance in collections may be hurting your credit score, consider pulling your credit report to review your records. You can view your credit reports from all three credit bureaus at AnnualCreditReport.com. You can also create an Experian account to receive your Experian credit report for free along with FICO® Scores☉ based on Experian data. Going forward, reviewing your bank balance regularly could help protect your credit and minimize costly overdraft fees.