Having a bank account is convenient for spending and paying bills. But, if you get hit with sneaky overdraft fees, it can turn into quite the headache.
Good news: There are some ways to get around them. Here’s a closer look at how overdraft fees work, why banks charge them, and which bank has the best overdraft limit.
What is an overdraft?
An overdraft happens when transactions posted to your bank account exceed your balance. In other words, your balance ends up in the negative.
Overdrafts are problematic because they cost you money. And, over time, they can add up. In fact, banks can charge an overdraft fee for each transaction you have that exceeds your balance – which means you could get charged multiple fees in a day.
Types of overdrafts
When an overdraft happens, the bank essentially covers the transaction for you and charges a fee for doing so. There are two main types of overdrafts: authorized and unauthorized.
Authorized overdraft means you have an agreement with the bank that covers transactions that go over your balance.
Your bank might offer you an overdraft line of credit that you can draw against. Say you have a checking account and the bank grants you a $1,000 overdraft limit. That means you can spend all the money in your account, plus up to $1,000 more before the bank will block any further transactions.
That sounds convenient but there’s usually a catch or two. You might pay a daily, monthly, or annual fee for this type of overdraft protection. And the bank may also charge you interest on the line of credit.
Unauthorized overdrafts happen when there’s no agreement in place about how much you can spend above your balance. This type of overdraft can open you up to overdraft fees.
Overdraft Fee Calculator 
Why do overdrafts happen?
Here are some of the most common scenarios that can result in overdrafts:
1. Intraday overdraft
An intraday overdraft – or daylight overdraft – happens when a bank transfers more money than it has in its reserve account. (The Federal Reserve sets the reserve requirements for banks.)
Example: If a bank has assets of $100 million and the Fed requires a 10% reserve, the bank has to keep $10 million on hand at all times. If the reserve dips below that level because the bank is transferring money out, that can create an intraday overdraft. In that case, the Federal Reserve lends the bank money to cover the gap.
2. Bank fees
Hidden or unexpected fees your bank charges to your account could result in an insufficient balance.
Example: Any new transactions that post could lead to overdraft fees.
3. Merchant overdraft
Business bank accounts can sometimes run into the negative just like personal bank accounts.
Example: Say they’re counting on a payment from a customer so they process payroll for the week, only the customer’s check gets lost in the mail. In that case, they may have to rely on their bank’s overdraft services to cover the payroll payments.
4. ATM overdraft
Getting cash at the ATM is convenient but you could end up in overdraft if you take out too much cash. This can happen accidentally or intentionally but the result is the same: overdraft fees for you.
5. Merchant error
Merchant error can cause overdrafts if purchase amounts are entered incorrectly or a transaction is processed more than once. That’s why it’s always important to check the total before you pay and get a copy of your receipt – just in case merchant error causes an overdraft.
6. Authorization holds
Authorization holds can unintentionally cause overdraft if your bank is holding back part of your balance.
Example: If you book a hotel room using your debit card, the hotel might hold the amount of the booking until you check out. In the meantime, this hold could shrink the amount you have available to spend. If you have transactions that post against the hold amount that could put you in overdraft.
What's the average overdraft fee?
As mentioned, banks can charge overdraft fees for transactions that go over your balance. In 2020 alone, banks raked in an estimated $30 billion in overdraft fees, according to an analysis by Moebs Services.
The median overdraft fee at banks that charge them is $30. That doesn’t sound so terrible if you’re getting hit with the fee one time. But if you get one overdraft fee per month, that adds up to $360 per year.
According to the Consumer Financial Protection Bureau, 5 percent of people with bank accounts overdraft them 20 times a year or more. That’s $600+ each year they’re handing back to the bank in fees!
Four types of overdraft fees
Overdraft is an umbrella term that describes what happens when a bank account balance ends up in the negative. Overdraft fees are what the bank can charge you when that happens.
There are four different kinds of fees banks can assess:
1. Overdraft fee
This is the fee the bank can charge when you have a transaction that exceeds your balance. Again, the typical overdraft fee is around $30, though some banks can charge more or less. Banks can also decide when to cap these fees, if at all.
2. Non-sufficient funds fee (NSF)
A non-sufficient funds fee happens when a debit card transaction is processed even though your bank account has a zero or negative balance. Non-sufficient funds fee amounts vary from bank to bank, though they’re often similar to overdraft fee amounts.
3. Overdraft protection fee
Overdraft protection means you’ve authorized your bank to transfer funds from your savings account to your checking account to avoid overdraft. In exchange, the bank charges you a fee for this service.
Overdraft protection fees are lower than standard overdraft fees. For example, you may pay $10 to $15 per transfer versus $30 or $35 for overdraft fees. But you do have to opt-in to this protection to take advantage of it.
4. Extended overdraft fee
An extended overdraft fee can apply when your bank account balance stays in the negative for a number of consecutive days. The amount you pay depends on the bank. For instance, U.S. Bank has an additional extended overdraft fee of $36 which starts on the eighth calendar day and each week afterward.
Are overdraft fees illegal?
No, but there are rules banks have to follow when charging overdraft fees. Specifically, the Overdraft Protection Law prohibits banks from automatically charging their account holders overdraft fees from ATM withdrawals and one-time debit charges. Consumers can opt-in to an overdraft coverage and service if the bank offers overdraft protection.
The Overdraft Protection Law only covers pre-authorized transactions which are not authorized. For example, that includes ATM cash withdrawals and debit card settlements. Meanwhile, the federal law does not apply to automated bill payments, checks, and money transfers. Banks can still charge an overdraft fee for those transactions if you go over your account balance.
Four ways to avoid overdraft fees
If you’d like to skip out on paying overdraft fees, here are some tips that could help you sidestep them.
1. Link your checking and savings accounts
Linking your checking account to your savings account gives you an easy way to transfer money if you think you’re in danger of overdraft. You could also link a checking account to a credit card if your credit card company allows you to do so as a form of overdraft protection. But remember, this could mean paying fees and interest.
2. Set up banking alerts
Setting up transaction and low balance alerts is easy to do through online and mobile banking. You can set up an alert to notify you when new transactions post or your balance dips below a certain amount so you can make a deposit to avoid overdraft fees.
3. Choose a bank account with no overdraft fees
Instead of paying your bank $30 or more for each overdraft, you could choose a bank account that doesn’t charge these fees at all. Chime, for example, offers bank accounts with no overdraft fees, monthly maintenance fees, or minimum balance fees. You can even link external bank accounts to a Chime Checking Account for added convenience.
4. Budget carefully and track your spending
The most effective way to steer clear of overdraft fees is to pay attention to what’s going in and out of your bank account. Setting a budget you can stick to and tracking your spending daily can help you keep tabs on your balance so you stay in control and avoid overdraft fees.
What is an overdraft limit?
An overdraft limit is the maximum amount that banks allow you to withdraw. For example, you might have a bank account balance of $5,000 with an overdraft limit of $500. It means that you can spend up to $5,500, but you can’t withdraw or request for an added money if the payment exceeds the limit.
But again, you might pay interest on this overdraft limit. So it’s worth considering whether you want to take advantage of overdraft limits, as they can be just as expensive as standard overdraft fees.
Banks with the best overdraft limit
Small and big banks usually offer an overdraft limit which ranges from $100-$1,000 depending on the income of the account holder. Here’s an at-a-glance guide to overdraft limits and fees for some of the top bank accounts.
Chime
Unlike traditional financial institutions, Chime has no unnecessary fees including hidden fees, monthly fees, overdraft fees, service fees, minimum balance requirements or fees, card replacement fees, transfer fee, or in-network ATM fees. So that means you get to keep more of the money you deposit without having to worry about fees.
Chase Bank
Chase Bank or JPMorgan Chase & Co. charges an overdraft fee of $34 per transaction and an overdraft limit of three settlements per day. This means you can be charged a total of $102 in overdraft fees per day.
Chase offers overdraft protection so you can link your savings account to your checking accounts. However, it doesn’t apply its standard overdraft protection services for a purchase that costs $5 or less or for an overdraft of $5 or less.
Wells Fargo
Wells Fargo charges its account holders a standard overdraft fee of $35 per transaction with a maximum of four settlements daily that can reach up to $140. Account holders can connect two backup accounts to their chief checking account with a regular charge fee for transfer fees.
U.S. Bank
U.S. Bank has a detailed overdraft fee structure. If you overdraw your account by $5, U.S. Bank will not charge an overdraft fee. But if you overdraw your account by $5.01 or omre, you’ll pay $36 for overdraft fees, up to four fees per day. This means you could pay $144 in overdraft fees daily. You can connect your savings account to your checking account for overdraft protection but this may mean paying up to $12.50 per transfer, depending on which account you have.
BBVA Compass
BBVA Compass offers several ways to manage and monitor your accounts to avoid overdraft fees, including banking alerts. The Overdraft Payment and Protection Programs also include Linked Account Overdraft Sweep Service, Overdraft Protection Line of Credit, and Courtesy Overdraft Option.
PNC Bank
PNC lets you take advantage of overdraft protection when you link your checking account to another savings, checking, money market account, personal line of credit, or credit card account.
Overdraft protection is less expensive than PNC’s standard overdraft fee of $36. PNC also limits you to four overdraft fees daily. And the bank declines ATM and one-time debit card transactions with no charge if your account balance is low.
SunTrust Bank
SunTrust Bank offers overdraft assistance, Overdraft Coverage and Overdraft Protection to help keep your balance in the black.
With Overdraft Coverage, you can make ATM or debit card transactions daily even with insufficient funds in your account. However, the bank will charge an overdraft fee of $36 for each purchase with a maximum of six settlements a day. SunTrust will not penalize you if the overdraft and returned item fees are below $5.
Overdraft Protection service guarantees that no overdraft or declined transactions will post once you opt in. You have to link your SunTrust checking account to a SunTrust savings, money market, credit card, or line of credit account to transfer funds. There’s a $12.50 fee for each transfer but you can avoid the charge by depositing funds to cover the overdraft on the same business day.
Bank of America
Bank of America won’t approve ATM withdrawals or debit card purchases if there are inadequate funds in your account. The bank also offers two overdraft options for processing check payments. The first option is paying a standard overdraft fee of $35 for every overdraft or declined transaction with a limit of four per day. The Decline-All option is also a $35 fee per item, but the bank won’t authorize purchases that will lead to an overdraft.
The verdict: Consider switching to a fee-friendly bank account
Big banks such as PNC, Bank of America, Chase, U.S. Bank, and Wells Fargo may have some appeal but they’re lacking when it comes to low overdraft fees. Even if you only overdraft your bank account once in a blue moon, it makes no sense to pay a steep fee for a budgeting snafu or spending slip-up.
Switching to a bank account that charges no overdraft fees, like the one offered by Chime, can help you keep more of your hard-earned dollars and cents. It’s easy to make the switch online and say goodbye to fee hassles.