What Is an Overdraft Fee? How to Avoid Extra Bank Charges
What is an overdraft fee? It is an additional payment resulting from overdraft transactions. This fee may reach $35 per transaction. That’s why you must avoid it.
An overdraft is ideal for account holders who want to make withdrawals, electronic payments, or use a debit card or check to make purchases when their bank accounts lack funds. However, this transaction also produces an overdraft fee. What is an overdraft fee?
Understanding more about this fee will help you avoid a painful surprise at the end of the day. Some people choose not to use an overdraft service to avoid this fee. However, without this service, they may need to pay an NSF fee when they make a payment with insufficient funds.
What is an Overdraft?
An overdraft is an optional service that lets account holders make a transaction when their checking accounts don’t have enough funds. Banks cover the shortfall so account holders can continue their transactions.
In other words, an overdraft lets you borrow money from the bank to complete a transaction. You will find a negative bank account balance after the bank completes the transaction.
This loan comes with interest and a fee. When account holders deposit money or receive an electronic transfer, the bank automatically deducts the overdrawn amount and fee from the deposit.
In a particular type of overdraft coverage, banks link overdrafts to account holders’ credit cards. Account holders must pay the overdraft within a set period. If they don’t pay it on time, banks may send the account to collection. This circumstance will affect account holders’ credit scores.
What is an Overdraft Fee: Definition and More
You must find out the overdraft fee amount your bank charges and the bank’s overdraft rule if you want to use overdraft service. Those fees and other bank account fees may cause you to pay an excessive amount each month.
1. What is an Overdraft Fee?
An overdraft fee is a charge account holders pay when they make a transaction or withdrawal exceeding their checking account balance. Frequently overdrawing your account will cause you to pay unnecessary fees.
These fees may pile up and exceed the overdrawn amount if you don’t realize you have an insufficient balance and keep making transactions. Consequently, you must spend a lot of money to pay the fee and the overdrawn amount.
2. How Overdraft Fees Work
Banks typically charge a fixed overdraft fee per transaction. For example, an account holder needs to make a $200 payment. However, he only has $100 left in his account. The bank then covers the $100 shortfall to continue the transaction and charges him a $20 overdraft fee.
Therefore, his account balance is now -$120. He must deposit $120 to restore his balance to zero. He may even need a larger deposit to pay other checking account fees.
Recently, some banks have adopted more customer-friendly overdraft fee policies. One of them is the grace period policy. \
In adopting this policy, banks give account holders an extra business day to deposit funds. They don’t need to pay overdraft fees if they deposit sufficient funds to cover the overdraft.
3. How Much Does an Overdraft Fee Cost?
Overdraft fees vary between banks, ranging from $10 to $35 per transaction. Meanwhile, the national average overdraft fee is $26.77. The fee will multiply if you keep making overdrawn transactions with an insufficient balance.
4. Overdraft Fees vs NSF Fees
Overdraft and NSF fees are penalties account holders pay when they make transactions with insufficient account balance. However, banks charge the former without rejecting the transactions.
On the other hand, banks will reject those transactions and charge NSF fees if account holders opt out of overdraft coverage. Moreover, the national average overdraft fee is higher than the national average NSF fee.
How to Avoid Overdraft Fees
You must avoid bank fees, including overdraft fees, if you want to cut unnecessary spending. Therefore, you will have extra money to save or meet your end needs. To avoid overdraft fees, you can follow these tips.
1. Opting out of Overdraft Coverage
You won’t need to pay overdraft fees if you opt out of overdraft coverage. When you opt out of this coverage, banks will reject a transaction if it exceeds your account balance.
Opting out of the coverage may cause you embarrassment when you accidentally make a payment in public with an insufficient account balance. However, you can avoid this risk if you use your checking balance carefully.
2. Monitor the Checking Account Balance
If you want to opt in to this coverage, you must monitor your checking account balance regularly to avoid overdraft fees. Monitoring your account helps you track your balance and avoid overdrawn transactions.
You must also check your account balance before making a large purchase. If you don’t have enough balance, you can deposit funds into your account immediately. Therefore, you don’t need to make overdrawn transactions or pay overdraft fees.
3. Switch to a Fee-Free Checking Account
You may need to consider switching your current checking account to a new one to avoid overdraft fees. When you are shopping for this account, examine the bank overdraft rules beforehand.
Some banks, particularly digital banks, don’t offer standard overdraft and NSF fees with their checking account products. Therefore, you don’t need to pay insufficient funds fees. However, you won’t be able to make overdrawn transactions with this account.
4. Overdraft Protection Transfer
You must consider setting up overdraft protection transfer if banks offer it for free. This setting allows banks to draw funds from your savings or another checking account to cover transactions that exceed your main account balance.
5. Sign Up for Bank Alerts
Another way to avoid overdraft fees is to set up a low-balance alert in your bank mobile app. Therefore, you will get an alert when your account balance drops to a certain threshold.
6. Keep a Cushion Balance
Keeping an extra fund in your balance can help you avoid overdraft fees. This fund is useful to pay forgotten recurring transactions, such as automatic monthly payments and subscriptions. The amount of this fund must be close to what you normally spend each month.
7. Ask for a Waiver
You can try to request a waiver if you rarely overdraw your checking account. Banks may waive your overdraft fee if it is your first fee and you explain the reason to waive it clearly and politely.
What is an overdraft fee? Banks charge you this fee if you make a payment with an insufficient account balance. Banks will not charge you overdraft fees if you opt out of overdraft coverage. However, opting out of this coverage may charge you an NSF fee when your transaction exceeds your account balance.