If you’re like most people, you’ve probably been hit with an overdraft fee at some point in your life. These fees can be painful and annoying, but they’re also unavoidable if you need to learn how they work and how to avoid them. This post explains precisely how overdraft fees work so you can stop paying them or at least minimize the amount of money lost due to this particular type of penalty charge!
Understanding overdraft fees
An overdraft fee is a fee your bank charges you when you spend more money than you have in your bank account.
Banks charge overdraft fees on every transaction that puts you in red, ranging from $30 to $35 per item. So, if there are multiple purchases within an hour or so that overdraw your account—for example, a $5 breakfast sandwich and coffee, then lunch at Subway ($12), gas up the car ($20), groceries for dinner ($40)—you can rack up a lot of penalties quickly!
How do They work?
Banks charge overdraft fees when you spend more than what’s in your bank account. For example, if you write a check for $100 and your balance is only $90, the bank will automatically pay it out of its own account. In this case, the bank charges an overdraft fee for paying out that extra $10.
Overdraft fees are one of the most lucrative sources of income for banks—they’ve been estimated as high as six billion dollars per year in some cases! The way banks make money from overdrafts is simple: they either charge a flat fee or a percentage of each transaction that goes over budget. Flat fees will generally be between $20-$50, while percentages usually range between 1% and 5%. Or you can find a bank with no overdraft fees.
How To Avoid Them?
The best way to avoid overdraft fees is to be smart about your money. To do this, you can:
- Use a budgeting app to help you stay on top of your spending and ensure it stays within your budget.
- Set up a direct deposit so that your paycheck is automatically deposited directly into your checking account instead of going into an old savings account that might not have enough money in it at any given time.
- Pay bills electronically; this way, you’ll know precisely when they’re due and will have time to pay them before they’re due if needed (you should always try not to bounce any checks).
- Use debit cards with low overdraft fees (about $10 or less) rather than credit cards (which can cause much higher fees).
For example, “You can overdraw up to $50 in debit card purchases. Any debit card purchase exceeding this amount will automatically be declined,” says SoFi.
Is an overdraft fee the same as an insufficient funds (NSF) fee?
No. An overdraft fee is charged when you write a check or use your debit card for an amount that exceeds the available balance in your account. Insufficient funds (NSF) fees are charged when a transaction goes through and there needs to be more money in your account to cover it, even though you may not have authorized it yourself. In this case, the bank will refund the transaction after assessing the NSF fee but will only be able to prevent them from occurring due to insufficient funds.
Overdraft fees are a common way for banks to recoup some of the money that customers overdraw from their accounts. For example, some banks offer overdraft protection plans, which allow you to avoid paying these fees under certain conditions. However, it’s important to understand what these terms mean to avoid falling into traps when signing up for one of these services!