How to Avoid Sky-High Overdraft Fees on Your Checking Account
Last updated December 3, 2020
We all make mistakes, but overdrawing your checking account is going to cost you more than ever before.
The average overdraft fee hit a record high this year, increasing to $33.47, according to a survey by Bankrate.com.
To put that into perspective: The average overdraft charge ($33.47) is more than double the average monthly service fee for an interest checking account ($15.50), and more than six times the average monthly fee on a non-interest checking account ($5.27), the report noted.
Making matters worse, some financial institutions charge multiple overdraft fees per day, which can happen if one transaction causes a series of transactions (other checks or automatic bill payments) to overdraw the account.
As a report by the Center for Responsible Lending noted: “Even banks that ‘limit’ the number of fees per day set that limit at three to six per day, adding up to $105 -$210 in a single day.”
Some banks charge ongoing overdraft fees—daily, every few days, or weekly—as long as the account has a negative balance. The CRL report blasted these extended overdraft fees for “kicking a person when they are down,” and making it more difficult for a struggling account holder to recover.
“The large majority of these fees are shouldered by banks’ most vulnerable customers, often driving them out of the banking system altogether,” the report concluded. “Bank overdraft fees cause particular harm to low-income consumers and communities of color.”
The nation’s bankers say they provide multiple tools to help customers manage their accounts and avoid overdrawing, including text alerts about low balances, and the ability to monitor their accounts online or by phone at all times.
Note: If you mistakenly overdraw and this is not a frequent occurrence, call the bank and ask to have the fee(s) reversed or reduced to a single fee.
A Major Profit Center
Financial institutions make a lot of money from overdraft charges—$34.6 billion in 2019, according to Moebs Services, a financial research company.
The nation’s three largest banks collectively earned more than $5 billion dollars from overdraft/non-sufficient funds (NSF) fees last year, according to the CRL report: JPMorgan Chase ($2.06 billion), Wells Fargo ($1.69 billion), and Bank of America ($1.56 billion).
Overdraft prices, which have been going up at both banks and credit unions, are “becoming unreasonable,” said Michael Moebs, an economist and CEO.
Moebs surveyed the marketplace last month and found many financial institutions (31 percent of all banks, credit unions, thrifts, and fintech firms) do not list overdraft fees on their websites.
“A lack of price information on a good or service often signals a luxury item, which overdrafts are not,” he said. “Overall this lack of transparency is a big concern.”
Note: You can find a few online checking accounts with no overdraft fees, including Chime (for those in its "SpotMe" overdraft program), Simple, Discover, and Key Bank’s Hassle-Free Account.
How to Avoid Overdraft Fees
Because you can access the money in your checking account in so many ways—check, ATM withdrawal, debit card purchase, and automatic billing—it’s easy to lose track of the balance and find yourself in a penalty situation.
If it happens to you, you’re not alone. About 120 million Americans are expected to overdraw their checking accounts this year, based on Moebs’ data.
“Avoiding costly overdrafts requires keeping close tabs on your checking account balance and specifically the amount available for immediate withdrawal,” said Greg McBride, chief financial analyst at Bankrate. “That check you deposited yesterday may not be able to be withdrawn today, so it’s not just how much you have in the account, but what’s available for immediate withdrawal. That ‘available balance’ is what really counts before you initiate a transaction.”
Here are some things you can do to avoid costly overdraft fees:
Set up alerts. Have your financial institution text or email you when your balance drops below a certain level. It’s a good idea to regularly check the balance with an app or online, but an alert is a proactive way to make sure you don’t spend more than you have in the account.
Link accounts. Link your checking account to a savings or money market account at that same financial institution. That way, you can cover any overdrafts with your own money.
In most cases, you’ll pay for this service, typically $12 or less per transfer, according to the banking experts at NerdWallet, but it’s cheaper than an overdraft charge.
Get a line of credit. With an overdraft line of credit, the bank will lend you money to cover any overdrafts. You will pay interest on that small loan, but if you pay it back quickly, it will probably cost less than the overdraft fee.
Use automatic deposit. Whether you are employed, on a pension, receive government benefits, or get any other recurring payment, direct deposit gives you quicker access to that money.
Balance your checkbook and track transactions. No matter how you do it, paper register or computer program, keep track of all the withdrawals from your checking account: checks, debit card transactions, automatic bill payments, and deposits.
Those recurring automatic payments can really trip you up. You could have enough money in the account when you write a check, but too little to cover it because an unexpected automatic withdrawal lowered the balance before the check was cashed.
That happened to me once. So now, at the end of December, I enter all the automatic bill payments for the year in my Quicken software. It takes a little time, but I always know how much is in my checking account.
Don’t try to play the “float”—the time it takes for a check to clear. If you don’t have the money in the bank to cover a check, don’t write it. It’s simply not worth the risk.
Decline debit card overdraft protection. When you open a checking account, the bank or credit union must ask you if you want overdraft protection for point-of-sale debit card purchases and:
- If you decline overdraft coverage and try to buy something or make an ATM withdrawal that would result in a negative balance, that sale or cash withdrawal will be declined.
- Accept overdraft coverage and that transaction will be approved, allowing you to overdraw your account which will result in an overdraft fee.
“Many consumers prefer the security of knowing their transactions will be covered, even if there is a fee,” the American Bankers Association told Checkbook. Consumer advocates believe many people agree to debit card overdraft protection without understanding it could result in fees.
Note: Even if you signed up for overdraft protection, you can decline the coverage at any time and avoid any future fees.
More info: From Nerdwallet: Overdraft Fees: Compare What Banks Charge
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.