Banking

How Overdraft Fees Work

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 5 minute read

If you’ve been charged an overdraft fee, take action swiftly to avoid further charges. Checking your balance and discovering you’ve overdrawn your account is the most disheartening experience of all. Not only is it the fact that you need to improve your money management abilities, but also the bank’s cost for you making the error in the first place.

As long as you don’t pay the overdraft fees, they’ll keep piling up. A simple error may seem to be a personal attack, yet you’re not the only one in this situation. More than $11.45 billion in overdraft fees were collected by banks in 2017 according to a 2018 research by the Center for Responsible Lending, which evaluated FDIC data.

This is what you’ve been reading. An estimated $11.45 billion. If you want to prevent being one of the many people who lose their money to overdraft fees, you need to know what they are and how to avoid getting hit with them. Overdraft costs are explained in detail here.

What is a service charge for an overdraft?

You are charged an overdraft fee if your bank account balance is insufficient to fund a transaction or withdrawal. An overdraft protection program may cover the transaction if it isn’t immediately refused due to inadequate cash. That purchase or withdrawal can be made, but your bank will charge you a fee to cover the expense.

The costs associated with overdrawing a checking or savings account are more common, but they are not exclusive to them. The typical overdraft price is $35, and you can expect to pay no more than four to six overdraft fees each day, according to Chime, a checking account that offers practically fee-free service to its customers. It’s easy to observe how rapidly the totals mount up.

What are the fees associated with overdrafts?

However, while overdraft fees are typically considered just a single fee, there are really a few distinct fees that each have their own expenses attached to them.

Fee for overdraft

Even the greatest checking accounts get hit with an overdraft fee, which is the most prevalent of all fees. The bank charges you this fee each time it conducts a transaction that uses more of your account’s available funds than you have. Overdraft fees can range from $9 to $38 per transaction, although the average is $35. All banks have different regulations regarding overdraft fees and the number of fees your account is susceptible to in a day.

Charge for overdraft protection

Several of the finest banks provide an opt-in overdraft protection option that protects you in the event of a transaction that exceeds your available amount. This is accomplished by connecting your checking account to another account that serves as a precaution against overdrafts, moving funds in the event that your checking account runs out of funds. Banks frequently charge a monthly service fee for this service, which may be rather high. For example, Bank of America charges a $12 per-transfer fee for overdraft protection.

Overdraft charge for an extension

Many banks may impose an overdrawn balance fee if you keep an account in the red for a particular number of days—usually five to seven days. In some banks, this fee is charged once every five to seven days, but in others, it may be charged every day until you add enough cash to get your account balance back over 0. Depending on your bank, you may be charged as much as $36 each time you have an extended overdraft. Each day your account is overdrawn by more than five days, PNC Bank charges you $7.

The service charge for non-payment

Similar to overdraft fees, non-sufficient funds (NSF) fees may be levied on your account if the transaction is rejected by your bank due to a lack of account balance. With overdraft protection, the bank may allow the transaction to go through since you have another way of paying for it. Unless you have overdraft protection, the bank may reject your transaction and you may be charged an NSF fee. Banks may charge different amounts for this service.

4 methods to avoid excessive drafting

  1. Avoid overspending. This may seem like the most apparent option, but it necessitates good money management. Doing so entails tracking your monthly income and outgoing expenses. Creating a budget is the greatest method to avoid being hit with a charge for overspending.
  2. In order to prevent hefty overdraft fees, you may want to consider signing up for overdraft protection. Overdraft protection sometimes involves attaching your checking account to another account, such as a savings account. If you utilize this tool to pay for a transaction, be aware of the account you’re withdrawing from to pay for the fees.
  3. Open a bank account with no fees. Choosing a bank that doesn’t charge or waive overdraft fees is another option for avoiding these expenses. Good money management is recommended even if your bank doesn’t charge you for these fees.
  4. Consider signing up for alerts. Some banks will provide a service you may sign up for to be alerted when your available balance falls below a specific level. This provides you a last-minute chance to add funds to your account before it’s too late.

Accounts with no overdraft fees

Overdraft fees are one less item to worry about if you bank with an organization that does not charge them. Many online and mobile banks have taken this approach, and in addition to not charging overdraft fees, many have eliminated most other banking expenses as well.

Chime 

There are no costs for using the Chime, a financial services app. 2 In fact, there are no monthly service fees, overdraft fees, minimum balance costs, transfer fees, or fees for international transactions with Chime. Visa pays Chime a small fee every time you use your Chime debit card.

A debit card and an optional Automatic Savings Account are included, however, there are no branches because the bank is entirely mobile. If you’d like, you may even receive your payment early! Chime employees who have opted for direct deposit will have their paychecks sent to them up to two days earlier. 

SoFi Money

The high annual percentage yield (APY) of online savings account without the transaction restrictions generally associated with savings accounts is what you receive when you establish a SoFi Money account. There are no account fees, service charges, maintenance costs, or overdraft fees with this bank account. SoFi reimburses you if you’re charged an ATM fee by a different financial institution.

Online Savings Account for Citizens

Online-only bank Citizens Access offers high-yielding savings account with low fees and no branch locations. There is no option to deposit cash, therefore you are restricted to transferring money from another account or posting a check. Deposits may be performed effortlessly using your smartphone.
The bank’s no-fee structure may be worth the greater minimum balance requirements than many other online banks.

Bottom line

We all know the pain of overdraft fees. Despite the fact that you’re accountable for making sure your money is being properly managed, mistakes sometimes arise. Even when your bank refuses to cooperate with you, it could be time for a change. Check your accounts frequently and consider banking with institutions that have your best interests at heart. Keeping track of your funds is important.

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