Understanding Overdraft Fees: What They Are and How to Avoid Them
Written by: Jacob S.
Published on:
Overdraft fees can be a frustrating surprise, especially when you're trying to manage your money carefully. If you've ever found yourself spending more than what's in your bank account—even by just a few dollars—you may have faced one of these charges.
What Are Overdraft Fees?
An overdraft fee is a penalty your bank charges when you spend more money than you have in your checking or savings account. This can happen during:
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ATM withdrawals
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Debit card purchases
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Writing checks
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Automatic bill payments
Even if you're unaware that you're overdrawing your account, the bank will still process the transaction and charge you a fee. For example, let’s say you have $10 in your account and try to buy a $15 t-shirt. Your bank will cover the $5 shortfall—but they’ll also tack on an overdraft fee, which can be much more than the amount you overdrew.
How Much Do Overdraft Fees Cost?
While fees vary from bank to bank, the national average overdraft fee is around $35 per transaction.
Here’s the catch: You can be charged multiple times in a single day. If you make several small purchases while your account is overdrawn, the fees can add up quickly—sometimes reaching hundreds of dollars in just 24 hours.
Some banks also charge a sustained overdraft fee if your account stays in the negative for several days. This fee may continue to accrue until you bring your balance back above zero.
Most banks now limit the number of overdraft fees they charge daily—but even with limits in place, these fees can still hurt your wallet.
How Do Overdraft Fees Work?
When you spend more than what’s available in your account, your bank might still approve the transaction—whether it’s a debit card purchase, an ATM withdrawal, or a bill payment. This means the bank is essentially covering the difference for you, rather than declining the charge. In return, they’ll charge an overdraft fee as a service cost.
As a result, your account balance drops below zero, leaving you with a negative balance that includes both the overdrawn amount and the fee.
For example, if you have $20 in your account and buy something for $35, your bank may let it go through, but you’ll be $15 short. Add in a $30 overdraft fee, and your balance will fall to - $45.
There are a few important things to keep in mind.
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If you make several purchases while your account is overdrawn, you may be hit with multiple fees—and some banks process transactions in a different order than you made them, which could lead to even more charges. Thankfully, most banks now limit how many overdraft fees they can charge per day.
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Also, for ATM and one-time debit card transactions, banks can’t charge overdraft fees unless you’ve opted in to coverage. If you haven’t, the transaction may simply be declined, helping you avoid extra costs altogether.
Why Do Banks Charge Overdraft Fees?
Banks argue that allowing overdrafts can help customers avoid bounced checks, which might result in additional fees from merchants. By covering your shortfall, they provide a service—but at a price.
However, this doesn’t always apply to debit card or ATM transactions, where there usually aren't merchant penalties. In those cases, banks are primarily offering a convenience—and charging you for it.
Debit card transactions are also the most common reason people accidentally overdraw their accounts.
What Is Overdraft Protection?
Overdraft protection is a service banks offer that helps you avoid fees by linking your checking account to another account (like savings or a line of credit). If you overdraw your checking account, funds are automatically transferred from the linked account to cover the transaction.
Here are your main options:
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Linking to a savings account. Often no fee or a small transfer fee
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Line of credit or credit card. May involve interest charges
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Opting out of overdraft services altogether. Your card will simply be declined if you don't have enough funds
Studies show that consumers who opted out of overdraft programs paid about $450 less annually in fees than those who remained enrolled.
Do Overdraft Fees Affect Your Credit Score?
Generally, overdraft fees do not affect your credit score directly. However, if you leave your account overdrawn for too long and the bank sends your account to collections, it could end up damaging your credit.
To stay in the clear, be sure to monitor your account and take action quickly if you overdraw.
How To Avoid Overdraft Fees
Avoiding overdraft fees comes down to a few smart financial habits:
1. Track Your Balance
Keep an eye on your account with mobile banking alerts or budgeting apps. Know how much you have—and what’s scheduled to come out.
2. Set Up Overdraft Protection
Link your checking to a savings account or credit line. This safety net can save you from expensive fees.
3. Opt Out of Overdraft Services
If you’d rather your transaction be declined than get hit with a fee, contact your bank and ask to opt out of overdraft coverage for ATM and debit card transactions.
4. Deposit Funds Quickly
If you accidentally overdraw your account, try to deposit money as soon as possible to avoid sustained overdraft fees.
5. Use Banking Tools
Many banks offer tools to help you avoid overdrafts—such as low balance alerts or account activity notifications. Take advantage of these features to stay one step ahead.
Overdraft fees are one of the most common—and costly—banking charges. But with the right knowledge and a few proactive steps, you can avoid these unnecessary penalties and keep more of your hard-earned money in your pocket.
If you're looking for better banking options or smarter ways to manage your cash flow, make sure to explore fee-free accounts and financial tools that work with your budget.
