What is an Overdraft Fee?

Overdrawing your account is nerve-wracking — and it can quickly spiral into more of a nightmare if you find yourself hit with multiple fees, making your account go even more in the red. Let's dive into what an overdraft fee is, how overdrafts work, the criticisms surrounding them, and the different ways you can avoid them entirely.  

What is an Overdraft Fee and How Do They Work?

An overdraft fee is a charge that a bank imposes when you make a withdrawal or payment that exceeds your available balance. For example, if you have $50 in your checking account and you make a purchase for $60, your account will be overdrawn by $10. Instead of rejecting the transaction, the bank may cover the shortage — whether through a linked account or a line credit, effectively loaning you the amount needed to complete the transaction. If your savings account is linked, it will transfer money from your savings to your checking account to cover the overdraft. If the bank uses a line of credit, it will extend you a loan to cover the overdraft. Many banks will then charge you a fee for that loan —on average $30-40 per transaction that goes over.

The Overdraft Debate

Overdraft fees have faced criticism for many reasons from high cost to their impact on vulnerable consumers. Paying a $30 fee for a $5 cup of coffee can feel unfair and be financially burdensome. Not to mention, if you have multiple transactions that overdraw your account on the same day, you can be charged a separate fee for each occurrence, quickly accumulating significant charges.

In response to these concerns, regulatory changes have been implemented in some regions to make overdraft policies more transparent and protect consumers. These changes include requiring banks to obtain explicit consent for overdraft protection and providing clearer disclosures about fees.

How to Prevent an Overdraft Fee

There are a few things you can do to avoid overdraft fees:

1. Monitor Your Account and Set Up Alerts. Keep a close eye on your account balance and pending transactions to ensure you have sufficient funds to cover your expenses. Setting up account alerts that notify you when your balance falls below a certain amount.
2. Overdraft Protection. An optional savings or line of credit account linked to your checking that can help secure your buying power and reduce declined transactions. Money is advanced automatically in exact amounts when you need it, helping to keep your account from becoming overdrawn.
3. Opting Out of Overdraft. You can always opt out of overdraft--meaning if you try to make a transaction with insufficient funds, it will simply be declined, and you won't incur an overdraft fee. Keep in mind, that if a transaction is declined you may have other late fees from 
4. Choose a checking account free of fees. Bank with an institution like FNBO that offers a free checking account with flexibility and no overdraft fees. 
5. Budgeting. If overdrawing is a recurring issue, consider creating a financial budget to better understand and manage your expenses.

Overdraft fees can be a costly and frustrating experience. By understanding how they work and taking steps to avoid them, you can save yourself money and headaches.

If you have questions about overdraft, free checking, or any of your banking needs, a Personal Banker from FNBO would be happy to answer them. Give us a call today.