What are Overdraft Fees?

Overdraft fees are often an unnecessary financial burden you carry when you exceed your banking limits. There’s a lot that goes on behind the scenes that you must be aware of as a bank account holder. In this article, we will explain everything you need to know.

What Is an Overdraft Fee?

As per the definition, overdraft fees are the fees charged to you whenever you withdraw or use more money than presently available in your bank account.

This is often one of the most expensive fees charged by banks in the U.S. Therefore, it is advised never to cross your banking limits and stay within the budget. The charge may also come from a credit union if you’ve used credit services.

How Do Overdraft Fees Work?

If you’re completely new to overdraft fees, you should know how the cost is calculated and when you’re billed for it.

Overdraft fees are associated with something called overdraft protection. This service’s primary function is to ensure an uninterrupted banking experience even when you exceed your bank balance. Think of cases like a bounced check or missing a payment deadline because you don’t have enough funds in your account. These things are not uncommon, especially among people who don’t keep track of their monthly spending and knowingly or unknowingly spend more than they have in their bank account.

These events are catastrophic for your financial health. To save you from this, banks offer overdraft protection and pay the extra amount on your behalf. In exchange for this service, they charge an overdraft fee.

Understanding the fees in a real-life scenario, suppose you have $30 in your account. And then you make a payment of $50. The payment will be declined citing “insufficient account balance.” But if overdraft protection is enabled, the bank will pay the excess on your behalf. In the above case, this would be $20. So the bank will loan you $20 and charge a fee on it.

Almost all banks and credit unions provide this service for checking accounts.

But not all types of transactions will be processed under overdraft protection services. Which types of transactions are covered vary from bank to bank. But generally speaking, it’s the electronic transactions and overdrawn checks that are covered under this service.

Some banks will also cover debit card payments and ATM withdrawals, but it depends. It’s best to check with your bank regarding this matter.

Other things to keep in mind about overdraft fees:

• There is usually a flat fee charged for the services incurred, something like $35 or $50. This is irrespective of the excess amount banks cover on your behalf. But other banks may charge a percentage on the amount along with the flat fee. The fee is charged every time you invoke overdraft protection services.
• There’s a limit to overdraft protection, which is usually several hundred dollars. Anything above this limit will not be covered under this service.
• The bank will usually deduct the fee from the next deposit you make into your account. If you do not fund your account in the coming weeks or months, you may also incur additional overdraft fees, which is even pricier.
• If you cannot cover the fees or make your payments on time, your account may be closed, or the bank may send your case to a collection agency.

To get overdraft protection, you must link your checking accounts, credit cards, savings accounts, and other assets.

Do Overdraft Fees Hurt Your Credit Score?

When working with loans and credit, it is worth asking if overdraft fees hurt your credit score. The answer is no. Overdraft fees do not affect credit scores, not at least directly.

You need to understand that overdraft protection is not the same as credit or a loan. In fact, overdraft protection helps you against nonpayment by paying the extra amount on your behalf.

Overdraft fees are limited to your bank account, to which creditors do not have access. Credit bureaus like Experian or TransUnion do not use your bank account records to determine a credit score. Hence, they never know that you have defaulted on any payments.

Overdraft fees only hurt your credit score when the pending amount is transferred to a collection agency. Credit unions will then take into account the unpaid loan statement when calculating your credit score.

Therefore, if you claim overdraft services, make sure to clear the fees on time to avoid credit score damage.

How to Avoid Getting Overdraft Fees

Since overdraft fees are among the costliest ones charged by banks, you often end up wondering if you can avoid the fees.

There are a couple of ways you can avoid them. The first is to not use the protection it at all. That is, never exceed the amount you have in your checking account. This requires you to be more diligent in handling your account and keeping records of your expenses. Keeping track of your expenditures is more than effective against unintentionally spending more than what you have in your account. Alternatively, you can opt out of overdraft protection, in which case any payments that exceed your balance will be canceled.

The second method is to link your checking account to a savings account. This way, the extra amount is covered by your savings account. While a fee is charged when you transfer money from savings to checking, it is much lower than an overdraft fee.

You can also link your checking account to a credit card or any personal line of credit you may have. Thus, your credit card will cover the excess amount, eliminating the need for overdraft protection.

How to Get Overdraft Fees Waived

Finally, you may be able to get the overdraft fees waived. Yes, it is possible to do so. Look for the following three things:

• Talk to your bank directly. If you have a good history with the bank and explain that the transaction was a mistake, they may waive the fees because they have the authority to do so.
• Certain banks and financial institutions offer a forgiveness program that writes off specific fees once a year for selected customers. Check if you qualify for it.
• Does your bank have a “rewind” program? These programs allow you to waive the extra fees if the transaction is initiated, but your payment is scheduled for a future date. You can deposit the amount before the scheduled date and ask for the overdraft fees waiver.

Conclusion

Ideally, you should stay clear of any extra fees that the bank might charge unless you deliberately want to claim the services. In the case of overdraft protection, it’s your choice whether or not you want it. But you should have clarity on what the policy entails. Before opting for the overdraft protection program, read the fine print carefully to avoid the steep charges that come with such programs.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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