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How do overdraft fees work?

By Rebecca Lake
January 9, 2020

Checking accounts make it easy to spend, pay bills and even save, especially if you’re transferring money to a savings account automatically. 

The last thing you need is to get stuck paying high fees. Overdraft fees can be one of the most expensive charges banks can tack on. 

Here’s the lowdown on how these fees work and what you can do to avoid overdraft fees.

What are overdraft fees? 

In a nutshell, an overdraft fee is a fee that your bank or credit union charges you when a transaction exceeds the available balance in your checking account. This can include transactions like:

  • Online bill payments
  • Checks
  • Purchases made in-store
  • Online shopping 
  • Recurring subscriptions
  • ACH transfers to a different bank
  • Transfers between accounts at the same bank
  • ATM withdrawals  

Whether you can overdraft at an ATM depends on your bank. For example, your bank might let you overdraft your account by making a withdrawal at one of their ATMs but not if you’re using another bank’s machine to get cash. 

When you have a transaction that would put your balance in the red, the bank can still agree to pay it for you. For example, say you spend $125 at the grocery store but you only have $100 in your checking account. The bank can make up the difference for you to make sure the grocery store receives its money. But, you might end up paying an overdraft fee for that convenience. 

How overdraft fees work

The amount of an overdraft fee ultimately depends on the bank’s overdraft policy. For example, the bank might charge this fee for one type of transaction, i.e. online bill payments or returned checks, but not another. 

Something else that complicates things is the fact that there are different types of overdraft fees you might get hit with. Fees can fall into one of these four categories:

  1. Regular overdraft fees

The regular or standard overdraft fee is what your bank charges when you have a transaction that’s more than your account balance. The typical overdraft fee is $34, though banks can charge more or less. Chime, for instance, allows eligible members to overdraw up to $100* without charging a fee

The other side of that coin is that banks can stack multiple overdraft fees on your account. For example, if you’re already $50 in the negative and a recurring subscription charge goes through, you could pay separate overdraft fees for both those transactions. This could put you deeper in the hole. 

  1. Returned item fees

With regular or standard overdraft fees, the bank makes sure that the recipient gets paid. There are, however, situations where the bank may choose not to pay the transaction amount. In that case, the bank could charge a returned item fee in place of an overdraft fee. 

For example, say that you write your $900 monthly rent check but it gets returned because a deposit you made didn’t clear in time to cover it. The bank could charge a returned item fee in that case. In terms of cost, returned item fees tend to be similar to standard overdraft fees. 

  1. Overdraft protection fees

Overdraft protection is a service your bank can offer to help cut down on the cost of overdraft fees. This service is completely voluntary for you and you have to opt in to use it. 

If you enroll in overdraft protection and you have a transaction that would put you over your account limit, the bank will automatically transfer money from a linked savings account or money market account to cover the difference. In addition, the bank might let you use a line of credit for overdraft protection. 

This can help you sidestep the standard overdraft fee. But the bank could still charge you for this convenience. For example, you might pay $10 or $12 for each overdraft protection transfer. 

Remember, it’s totally up to you whether you want to opt in. Just keep in mind that if you opt out, your bank may not approve purchases or other transactions that are more than your account balance. 

  1. Extended overdraft fees

Ideally, if you get stuck with an overdraft fee, you could make a deposit to your account to cover the fee and put your balance back in the black. But if you don’t get your account back on track within a certain number of days, the bank may charge you an extended overdraft fee to go with the standard overdraft fee you already owe. Depending on the bank, this might be a one-time fee or you might be charged daily or weekly until you resolve the overdraft issue with your account. 

Can you waive overdraft fees?

If you rack up an overdraft fee or two, don’t panic. It’s entirely possible that your bank might waive or reduce the fees if you ask. 

You can call up the bank to ask about reducing fees or visit a branch to make your case. Whether the bank agrees to your request can depend on things like how long you’ve had your account, whether you’ve ever run into trouble with overdrafts before, and the amount that’s been overdrafted.

If you’ve had your account for five years and this is the first time you’ve ever been in overdraft, for example, then the bank might be more understanding about waiving the fee. On the other hand, if you’ve only had your account for a few months and you’ve had returned items or overdrafts before, then getting a fee waiver might be more difficult. 

Avoiding overdraft fees

Paying overdraft fees can put a real pinch on your bank account but there are a few things you can do to dodge them. 

The first and most obvious choice is to keep your money at a bank account that doesn’t charge overdraft fees

If you’re not ready to switch to another bank, you can consider enrolling in overdraft protection. But keep in mind that this might only reduce the fees you pay for overdraft, not erase them altogether. 

Another option: Try setting up banking alerts and notifications to stay on top of what you’re spending. For example, you could set up an alert to notify you once your balance dips below $100. This way you can make a deposit to beef it back up. 

Finally, you might want to think about setting up direct deposit with your employer. This way you’ll know when your paycheck is going to hit your account. With Chime’s direct deposit feature, for example, you can get paid up to two days earlier. And, this can potentially help you avoid overdraft fees. 

*Chime SpotMe is an optional, no fee service that requires that you receive $500 in direct deposit a month to qualify to overdraw your account up to $20 on debit card purchases. Chime, in its sole discretion, may allow you to withdraw your account up to $100 or more based on your Chime Account history, direct deposit history and amount, spending activity and other risk-based factors. Your Limit will be displayed to you within the Chime mobile app. You will receive notice of any changes to your Limit. Your Limit may be increased or lowered at any time by Chime.

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