Ifyou have a checking account, you might have to deal with an overdraft fee. Anoverdraft occurs when you don’t have enough money in your account to cover atransaction, and the bank or credit union pays for it anyway. Transactionsinclude ATM withdrawals and debit card purchases as well as checks and ACHpayments (such as online bill payments). Many banks and credit unions offeroverdraft programs, and these can vary by institution.
Generally,if you overdraw your checking account by a check or ACH, your bank or creditunion’s overdraft program will pay for the transaction and charge you a fee. Byallowing your account balance to fall below $0, your bank or credit union willalso effectively take the repayment right out of your next deposit. At mostinstitutions, the overdraft fee is a fixed amount regardless of the transactionamount, and you can incur several overdraft fees in a single day.
Overdraftfees work a little differently for debit cards. Your bank or credit unioncannot charge you fees for overdrafts on ATM and most debit card transactionsunless you have agreed (“opted in”) to these fees. If you choose to opt in todebit card and ATM overdraft, you are usually allowed to make ATM withdrawalsand debit card purchases even if you do not have enough funds at the time ofthe transaction. However, you will generally incur fees on transactions thatsettle against a negative balance later.
Ifyou have not opted in to ATM and debit card overdraft, debit card purchases andATM withdrawals will generally be declined if your account doesn’t have enoughfunds at the time you attempt the transaction. If you have not opted in, youwill still be able to make ATM withdrawals and debit card purchases when you haveenough funds at the time you attempt your transaction, and you will not incuran overdraft fee regardless of whether you have the funds to cover thetransaction in your account when the transaction later settles.
Sinceopted-in consumers allow their bank or credit union to charge them fees in theevent of an ATM or debit card overdraft, they generally pay more in overdraftfees than consumers who do not opt in. For example, in2014 the CFPB reported that opted-in accounts are three times as likely tohave more than 10 overdrafts per year as accounts that are not opted in. TheCFPB also found that opted-in accounts have seven times as many overdraft feesas accounts that are not opted in. Take a closer look at howconsumers are impacted by opting in to checking account overdraft.
Whetheror not you opt in, you may still be charged fees for overdrafts on checks orACH transactions. Still, deciding whether or not to opt in can be one of themost important decisions you make that affects the cost of your checkingaccount.
Hereare six steps you can take to reduce or eliminate overdraft fees:
- Trackyour balance as carefully as you can to reduce the chance you’ll overdraft. Also,sign up for low balance alerts to let you know when you’re at risk ofoverdrawing your account. If you haveregular electronic transfers, such as rent, mortgage payments or utility bills,make sure you know how much they will be and on what day they occur. Track thechecks that you write and note when the funds are deducted from your account,so that you do not accidentally spend money you have already paid from youraccount. You also need to know when the funds you have deposited becomeavailable for your use.
- Check your account balance beforemaking a debit card purchase (or ATM withdrawal), and then pause to ask yourself if you anyother payments coming up. Just because your account has enough funds whenyou’re at the checkout counter doesn’t mean you’ll have the funds later whenthe transaction finally settles. If you’ve recently written checks or madeonline bill payments that have yet to be deducted from your account, thesecould draw down your funds in the meantime, leaving you without enough funds tocover your purchase. Debit card overdraft fees can occur on transactions thatwere first authorized when there were sufficient funds to cover them, but tookthe account negative when the transaction settled.
- Don’t opt-in. You can avoid payingoverdraft fees when using your debit card for purchases and at ATMs by notopting-in, or by opting-out if you are currently opted in. This means that your debit or ATM card may bedeclined if you don’t have enough money in your account to cover a purchase orATM withdrawal at the time you attempt a transaction. However, it also meansyou won’t be charged an overdraft fee for these transactions.
- Link your checking account to asavings account. If youoverdraw your checking account, your institution will take money from yourlinked savings account to cover the difference. You may be charged a transferfee when this happens, but it’s usually much lower than the fee for anoverdraft.
- Askyour financial institution if you are eligible for a line ofcredit or linked credit card to cover overdrafts. You may have to pay a fee when the credit line istapped, and you will owe interest on the amount you borrowed, but this is usuallya much cheaper way to cover a brief cash shortfall.
- Shop around for a differentaccount. Find outabout your bank or credit union’s list of account fees, or ask about them, thencompare them with account fees at other banks or credit unions. Assess your ownhabits and what fees you may face. Consider penalty fees, such as overdraft andnon-sufficient funds charges, as well as monthly maintenance, ATM surcharge,and other service fees. When comparing banks or credit unions, you might alsowant to consider factors such as the hours of operation, locations, access topublic transportation, available products and services, and reputation forcustomer service.
Questions aboutoverdraft fees or checking accounts?
Check out Ask CFPB, our database of common financial questions and answers.
Submit a complaint
If you have a problem with overdraft fees or any otherfinancial products, you can submit a complaint online or by calling (855)411-2372
