What Are Overdraft Fees?

What Are Overdraft Fees? loading="lazy"

Overdraft fees are charges you receive from your bank or credit union when it covers a payment, electronic transfer or withdrawal you've made that exceeds the amount of funds available in your checking account.

How Overdraft Fees Work

Overdraft fees are associated with a service called overdraft protection, which prevents the embarrassing and potentially catastrophic consequences of writing a bounced check or missing a payment when you spend more than you have in your bank account.

In exchange for covering your overpayment, your financial institution charges you the fee (in addition to making you repay the amount they covered).

Many, if not most, banks and credit unions provide overdraft protection as a standard feature of checking accounts. Details of what's included with the service vary by institution, but they typically include:

  • The types of transactions covered by the policy. Protection typically extends to overdrawn checks and electronic transfers. Some institutions also allow you to make debit card purchases and ATM withdrawals that exceed the amount of funds in your account, but they must get your permission to do so when you set up the service.
  • The fee amount for each overdraft transaction. Fees of $35 are common, and multiple transactions can occur in a single day: If, for instance, electronic transfers to two separate businesses both occur on a day when your account is tapped out, your total fee would be $70.
  • The limit to the total amount of overdraft covered by the service. This is typically several hundred dollars.
  • Terms for paying fees and repaying the amount the bank advanced you to cover the transaction. Fees and cash advance amounts are usually deducted immediately from the next deposit placed in your account. Additional "extended overdraft fees" may be charged if no deposit is made to cover an overdraft within a specified time limit (72 hours, for example).
  • Consequences for failing to pay your fees on your cash advance amounts. These can include additional fees, closure of your account, and transfer of unpaid sums to a collections agency.

You'll find the specifics in the terms and conditions you received and agreed to when you opened your checking account.

Do Overdraft Fees Hurt Your Credit?

Overdraft fees do not, and cannot, directly affect your credit report or any credit scores based on credit report data. Credit reports maintained by the national credit bureaus (Experian, TransUnion and Equifax) do not track any bank account information, so they don't record overdrafts or related fees.

If your financial institution turns over your unpaid fees or negative balances to a collection agency, that will show up on your credit report and may adversely affect your ability to borrow money or open credit card accounts.

Overdrafts are also recorded in your ChexSystems report, a summary of your history of opening and maintaining banking accounts. Banks and credit unions use ChexSystems reports when deciding whether or not to take on new customers.

As long as you've paid your fees and repaid any overdraft protection funds advanced by your financial institutions, having a few overdrafts in your ChexSystems report won't likely be a concern. But if you have unpaid fees or negative balances at any bank or credit union you've done business with in the past, you'll need to clean up your ChexSystems report before another institution will let you open a new account.

How to Avoid Overdraft Fees

Obviously, the best way to avoid overdraft fees (and the best practice for managing your finances) is to maintain an account balance that can cover all your expenditures, including automatic withdrawals and transfers, outstanding checks that haven't cleared, and so on. Smartphone apps and other online banking tools make it easy to check your account status, monitor scheduled payments and otherwise prevent overdrafts, and you should take advantage of them when possible.

But since nobody's perfect, in case you do spend more than you have in your account, here are some options that can help you avoid costly overdraft fees:

  • Opt out of overdraft protection. If you do this, and you try to make a payment or fund transfer in an amount that exceeds your account balance, your bank or credit union will simply decline the transaction. This may not actually save you money, however, since your bank may charge a nonsufficient-funds (NSF) fee—often in the same amount as an overdraft protection fee—if you attempt to overdraw an account without overdraft protection. Furthermore, the intended recipient of a declined payment may charge you an additional fee or penalty. And if you end up missing the due date on a loan or credit card payment, your credit score could suffer.
    There is one way opting out of overdraft protection can save you money: if you opt out of protection specifically on debit card payments and ATM withdrawals (or choose not to opt in to them in the first place). While it can be frustrating and embarrassing to have a debit card transaction declined, it's arguably better to learn your funds are tapped out that way than to rack up overdraft fees without realizing it.
  • Link your checking account to a savings account. When you do this, funds are transferred automatically from savings into checking to cover any overdrafts. Banks and credit unions typically charge a fee for each transfer (and deduct it from savings at the time of the transfer), but it's typically lower than an overdraft fee. You may be able to link your accounts yourself, via online banking tools; otherwise, ask about doing so at your financial institution.
  • Link your checking account to a credit card or personal line of credit. As with a savings account link, your financial institution may charge a fee for accessing a linked credit account to cover an overdrawn checking account, but it'll likely be less than an overdraft fee. Of course, you'll be subject to any interest charges that apply to the amount transferred from your credit account. And transfers from credit accounts may be considered cash advances, and subject to fees from the lender or higher interest rates than normal card purchases.

Overdraft fees are an expensive convenience that may save you from even greater fees and penalties. But the best overdraft fees are the ones you never pay because you're aware of what you have to spend, and avoid using more money than you have available in your bank account.