What Are Overdraft Fees?

Sometimes, when we buy something but have insufficient funds, our accounts can have a negative balance. Not all banks allow this to happen, but for those that do, it can be rather convenient. You can imagine how liberating it can be to be able to withdraw against an account with a zero balance.

This is what is known as an overdraft. However, you may find that your bank has penalized you for overdrawing your account. This charge is what is known as an overdraft fee.

Keep on reading to find out what an overdraft fee is, what types of overdraft fees there are and how to avoid them.

What Are Overdraft Fees?

Simply put, an overdraft fee is the charge incurred when withdrawing against a zero or negative balance in your account. Each transaction you make at this point can incur an overdraft fee. This is the fine you pay to cover the cost of the transaction.

To avoid having instances where people abuse the overdraft facility, banks place restrictions on the number of times one can overdraw an account. You can expect to overdraw about 4-6 times a day with most banks.

On average, banks charge an overdraft fee of $35. And since this fee applies to every transaction, you can get charged hundreds of dollars. This means it is prudent to avoid making multiple overdraft transactions in a day.

What is so annoying and frustrating about overdraft fees is that they are usually expensive and hard to track. And it doesn’t matter which way you overdraw your account, whether it is through checks, ATMs or POS purchases with debit cards, these charges can pile up.

Types of Overdraft Fees

Below, we will briefly look at the type of overdraft fees that banks usually charge.

Overdraft Fee

This is the standard fee that you will incur every time money is withdrawn from an account with a zero or negative balance. However, not all amounts incur an overdraft fee. For instance, with some banks, this fee does not apply if you overdraw less than $5.

Non-Sufficient Funds Fee

An NSF is incurred when an attempt to overdraw an account is made but the bank rejects it. This is meant to discourage account holders from issuing checks when they know they have insufficient funds. The NSF fee is usually the same amount as the standard overdraft fee.

When you attempt to overdraw, these two things can happen:

  • Overdraft is approved: This means you get charged the standard overdraft fee
  • Overdraft is declined: Meaning you get charged the NSF fee

There is never a time in which you will be charged both at the same time. And while some banks separate these charges in your statement, others do not. (it can appear as one overdraft fee).

Overdraft Protection Fee

When you have two accounts linked at the same bank, you can use one of them to pay the overdraft fees of another. The fee that is charged for this is called the overdraft protection fee or the overdraft transfer fee. This is an opt-in service because the banks cannot automatically include this service for legal reasons.

Extended Overdraft Fee

Maintaining an account with a negative balance for an extended period of time can also attract a fee. This is called the extended overdraft or sustained overdraft fee. Usually, you are given five working days to get your account back in good standing.

How to Avoid Overdrafts Fees

Just because you can incur overdraft fees, it does not mean that should be the case. Here are a few ways in which you can avoid incurring them:

  • Keep track of all your transactions: The best way to keep track of your account balances and spending habits is by signing up for online banking. This will allow you to be mindful of any excess spending that can lead to an overdrawn account.
  • Set up email notification: If your bank allows, you can set up a notification limit. When your funds drop below that limit, you will receive a message telling you that you are in danger of overdrawing your account.
  • Ask the bank to waive It: If you have been a reliable customer, who rarely overdraws from an account, you can ask the bank to waive the overdraft fee. Just talk to a customer service representative and explain why you needed to overdraw your account in this instance. Most banks will understand.
  • Go to another bank: If the overdraft fees are too exorbitant or the bank doesn’t have the overdraft facilities you need, you can easily go to one that does.

Final Thoughts

Overdraft fees are frustrating and annoying, mostly because they’re unnecessary expenses. But knowing what an overdraft fee, the types of overdrafts fees there are and how to avoid them, you can be in better control of your finances. While an overdraft might seem convenient in a pinch, you can dig yourself into a financial hole if you are not well-informed about the fees that come with it.

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Grace Chen
Article written by

Grace Chen

Grace Chen has 10 years of experience in the financial field and have been delivering excellent business content through her articles.

Grace graduated from the Haas School of Business, University of California and is currently the chief editor of Communicate Better where she has written and edited thousands of articles published in various media.