What Is An Overdraft Fee? All You Need To Know

An overdraft fee occurs when a bank or credit union allows a transaction to go through even though you might not have enough money in your account to cover it. This is called an overdraft because more money has been taken from your account than you have available. 

However, since the bank is covering the cost, they might charge you a fee. This is known as an overdraft fee. Overdraft fees are among the most common checking account fees. In fact, banks rely heavily on overdraft and other checking account fees as a significant source of revenue.

Let’s take a closer look at overdraft fees and how much they’re costing you.

Overdraft vs. NSF fees

Overdraft and NSF fees are different types of checking account fees. 

• Overdraft fees: You might not have enough money in your bank account, but the bank lets the transaction go through, resulting in overdrawing (or “overdrafting”) your account. The bank essentially lends you money, covering the cost on your behalf. The bank then charges you a fee for this service.
• NSF fees: Nonsufficient fund fees, or NSF fees, are charged when the bank doesn’t let a transaction go through. If you don’t have the money in your account, the bank returns the transaction and charges you a fee for sending it back. You might also be subject to fees from the entity you tried to pay.

According to the Consumer Financial Protection Bureau (CFPB), overdraft and NSF fees make up about two-thirds of banks’ reported revenues from fees as of December 2021.

How much are overdraft fees really costing you?

Overdraft fees can take a toll on your pocketbook. In 2022, the average overdraft fee was $29.80. The overdraft fee is charged for each transaction that goes through while you don’t have enough money in your account. 

For example, let’s say you have $100 in your checking account. You have three transactions: $75, $40 and $30. The bank debits the first transaction, $75. This doesn’t leave enough money in your account for the next two transactions. The bank spots you the cash, bringing your balance to -$45. 

However, the bank charges an overdraft fee of $30. You have two transactions that triggered overdraft fees, so that’s a total of $60 in overdraft fees. Now your account balance is -$105. You need to make up that difference before your account is back in good standing.

A Brookings study showed that a frequent overdrafter might generate $720 in profit a year , while someone who has a basic bank account and doesn’t overdraft only generates about $57 a year in profit for a bank.

Strategies for avoiding overdraft fees

If overdraft fees are costing you, it might be time to take a step back and look for ways to avoid these fees. Here are some strategies you can use to reduce the chance that you’ll be charged an overdraft fee:

• Carefully track your spending and budget. Keeping track of how much money you have and where it’s going, as well as having a plan for your money, can help you avoid overdrawing your account.
• Set up account alerts. Many banks will send a text alert or push notification from its app if your account balance is getting low. This can be a good way to remain aware of your balance and reduce the chance of overdrafting.
• Look for an account without overdraft protection. Overdraft protection is a service offered by banks that allow transactions to go through, even if you don’t have enough funds in the account. You can look for an account, like some of those offered by Capital One Bank, that don’t offer overdraft protection. You can also opt out of overdraft protection with most bank accounts.
• Ask to waive overdraft fees. Some banks and credit unions will waive a certain number of overdraft fees each year. You might be able to get the fee reversed just by asking. Other banks have no overdraft fees if your account is overdrawn by less than a certain amount, such as $20 or $50. 

Look for banks with no overdraft fees or accounts that provide you different choices for overdraft protection. 

What’s the best overdraft option for me?

The best overdraft option for you is the one that works best with your personal finance situation. If you find yourself constantly overdrawing your account, you might need to look for underlying causes of your cash flow issues. You might consider opting out of overdraft protection until you understand and address cash flow.

Another consideration is having the protection for occasional mistakes and problems. Using a bank that won’t charge a fee for small overdrafts or that offers you the opportunity to waive an overdraft fee each year might make sense. 

Carefully consider how you use your bank and its services, as well as how money flows through your personal economy as you review overdraft options.

How to get banks to waive an overdraft fee

There’s no guarantee that your bank will waive an overdraft fee, but it’s possible to ask. Here are some steps you can take to potentially get an overdraft fee waived.

1. Check the bank’s overdraft policy. Find out if you qualify for no fees, or having a fee waived.
2. Call the bank’s customer service number and speak with a representative.
3. Be prepared to explain your situation and share why you have an overdraft. In some cases, you might be able to have a fee waived.
4. The less often you have an overdraft, the more likely you are to have a fee waived.

Glossary of overdraft terms

• Overdraft: When a transaction exceeds the amount of money you have in your account.
• Overdraft fee: The fee charged by the financial institution for allowing you to overdraw your account.
• Overdraft protection: A program in which you give the bank permission to allow transactions that exceed your balance. 

Overdrafts are an avoidable expense

Overdraft protection can be a useful tool if you don’t often exceed your account balance but are worried about covering a short-term expense. On the other hand, using overdraft protection too much can lead to high fees and cost you hundreds of dollars over the course of a year.

Frequently asked questions (FAQs)

Are fees charged for every overdraft I make?

Yes. Some banks charge a fee for each transaction considered an overdraft.

Can overdraft fees be refunded?

In some cases, a bank or credit union might refund your overdraft fee. You need to follow an established process for asking for your fees to be waived.

What is an actual overdraft example?

An example of an overdraft would be if you have $100 in your account, but you have a transaction for $130. The bank would allow the transaction to go through, resulting in a balance of -$30. If the bank charges an overdraft fee of $30, that would be added to your negative balance, bringing it to -$60. You would need to pay the entire amount you’re behind to bring your account back into good standing.