What Are Overdraft Fees and How to Avoid Them

Some banks and credit unions charge overdraft fees if you use more money than you actually have available in your checking account. The problem is, people often overdraw by accident and are assessed fees that make it even harder for them to rebuild their finances.

Below, we’ll discuss how to avoid overdraft fees, review what to do when an overdraft occurs and share the growing list of financial institutions that no longer charge for overdrafting, like Capital One and SoFi.

What Is an Overdraft Fee?

An overdraft fee is levied when you try to spend more money than you actually have available in your account balances, checking or savings. Such fees can be charged when writing a check that bounces, swiping your debit card when you have insufficient funds to cover the purchase or even withdrawing more cash than you have available from an ATM. In this case, the bank covers the cost and then charges you a fee for that service.

An overdraft fee is only assessed if you have opted into overdraft protection (also called overdraft coverage). On the surface, overdraft protection may sound useful. Instead of having embarrassing conversations when your card is declined or running the risk of expensive bounced check fees, overdraft coverage allows you to continue making purchases even when you don’t have enough money to cover the transaction.

So what’s the problem?

Overdraft Fees Are Expensive

The average overdraft fee costs $27.08, according to Bankrate’s 2024 study on overdraft fees. While this is a slight increase over the previous year, it is significantly lower than the $35 banks often charged a decade ago. In addition to the standard overdraft fee, many financial institutions charge $2 to $5 per day until your account has money again. In short, overdraft fees cost a lot of money — often more than you even overdrafted by.

Some banks also allow you to overdraw multiple times a day, meaning you could be hit with multiple fees in a single day before you even realize you’re overdrawn. Or they don’t stop you when your ATM withdrawal exceeds your account balance.
Notably, banks have increasingly moved away from overdraft fees (or reduced how much they charge) in recent years. According to the latest data from the Consumer Financial Protection Bureau, overdraft fees cost Americans $5.8 billion in 2023. While that sounds like a lot — and it is — it’s actually down $4 billion since 2019.

Overdraft Fees vs. NSF Fees

People often use the terms overdraft fees and non-sufficient funds fees interchangeably, but they’re not the same thing. While these are both considered “junk fees,” they actually represent two ends of the overdraft spectrum:

• Overdraft fees are only assessed if you’ve opted into overdraft coverage. In that case, your bank or credit union charges you when you spend more than you have in your account. The transaction still goes through — and you owe the bank a fee for essentially spotting you the cash at the point of sale.
• NSF fees may be assessed if you don’t opt into overdraft coverage and try to spend more than you have in your checking account. Your check will bounce or your card will be declined due to insufficient funds — and you’ll pay a fee for this.

Together, these bank fees represent a “darned if you do, darned if you don’t” scenario. If your financial institution charges both fees, you can expect to owe money whether a transaction goes through or doesn’t when you don’t have enough money in your account.

How Overdraft Fees Work

Let’s say your checking account has $50 in it, but you swipe your debit card for a pair of sneakers that cost you $100. With overdraft protection, you get to go home with your new pair of kicks, perhaps none the wiser that you have overdrawn.

Because your bank covered the difference between the cost of the shoes and what you had in available funds, your checking account is now in the negative. But it’s not just -$50; it’s -$85 because your bank charged you a $35 overdraft fee in addition to the $50 it loaned you.

That $100 pair of sneakers winds up costing you $135, plus any daily fee (called an extended overdraft fee) until you’ve deposited funds into your account to cover the purchase and pay off the overdraft fee.

How to Avoid Overdraft Fees

Overdraft fees are costly, and they can spiral in a way that makes it harder and harder to climb out of a negative balance. Here’s how to avoid them:

• Opt out of overdraft protection
• Monitor your account regularly
• Set up your account with low-balance alerts
• Set up automatic payments but don’t forget about them
• Opt in to direct deposit for your paycheck
• Keep a cushion in your checking account
• Consider overdraft protection tied to another account
• Don’t pay with debit cards for gas, hotels or car rentals
• Use a bank that doesn’t charge overdraft fees

1. Opt Out of Overdraft Protection

Contact your bank or credit union if you’re unsure if you’re signed up for overdraft coverage. If you are, ask to opt out. If you opt out of overdraft protection, however, be prepared for your card to be declined if you attempt to spend more than you have available.

Some banks will still charge a non-sufficient funds fee (NSF fee) when you attempt to swipe your debit card for more than you have available or write a bad check that is returned. Check with your financial institution to determine its specific fee structure.

2. Monitor Your Account Regularly

Gone are the days of balancing checkbooks after every check or debit card purchase. While some consumers still go through the process of balancing their checkbooks, more are increasingly allowing their mobile apps to do the work for them. This means you always have an up-to-date available balance right at your fingertips. 

Before making any purchase — online or in person — pull out your phone and verify your account balance.

3. Set Up Your Account With Low-Balance Alerts

Log in to your online or mobile banking platform and update your settings so your bank notifies you if your account balance dips below a certain threshold. Then refrain from making any card transactions until you have deposited funds into your account and your bank has processed them.

You’ll still need to check your account balance regularly, even with these alerts set up. If you set up an alert for funds below $100, have $150 in the account and spend $200, you’ll have spent more than you have available without having ever received a low-balance alert.

4. Set Up Automatic Payments — But Don’t Forget About Them

When you set up automatic payments for recurring bills, you can control the exact date that money is withdrawn from your account. Add reminders to your calendar so that you always know when money is being taken from your checking account. This is an area where many have gotten tagged for an overdraft fee because they weren’t alerted that their account had fallen into the negative balance.

5. Opt In to Direct Deposit for Your Paycheck

An easy way to ensure your checking account balance stays high enough to cover your expenses is to set up direct deposit for your paycheck, rather than waiting for delivery of a paper check and then driving to deposit it (or depositing it via mobile deposit and waiting for the funds to clear).

6. Keep a Cushion in Your Checking Account

Though you’re more likely to earn higher interest on money kept in a savings or money market account, it could be to your advantage to keep a chunk of change in your checking account to cover unexpected expenses. 

However, since frequent overdrafters have around $300 in their accounts according to federal government figures, this advice is likely only to apply to infrequent overdrafters who overdraw out of carelessness, not those struggling to pay bills each month.

7. Consider Overdraft Protection Tied to Another Account

Some banks will allow you to opt in for overdraft protection that covers your purchases by pulling funds from a linked account, like a savings account at the same institution or a checking account with another institution. 

Doing so may save you the fee that the bank charges for spotting you the cash when you overdraw, but there may be a separate annual fee for this service, plus a small fee each time you must use it.

8. Don’t Pay With Debit Cards for Gas, Hotels or Car Rentals

Such merchants typically place a hold on your card for a couple days; gas stations sometimes charge upwards of $50 while fancier hotels can place significantly more sizable blocks on your card for incidentals. Such a hold could be enough to overdraw you.

Instead, pay cash, use a prepaid debit card or swipe a credit card — but only if you intend to pay it off in full each month.

9. Use a Bank That Doesn’t Charge Overdraft Fees

The advent of online banking has brought increased competition to the market. Newer online-only entrants especially are offering no-fee accounts to attract new customers, and some traditional banks have been forced to follow suit. Do your homework on accounts that have no fees and pay out higher interest, and take the time to switch.

Banks and Credit Unions That Don’t Charge Overdraft Fees

The march to dump overdraft fees began in summer 2021 when online banking giant Ally eliminated its overdraft fees completely and then Alliant Credit Union followed Ally’s lead. Capital One later became the first top 10 U.S. bank to dump overdraft fees.

Since then, more major financial institutions have followed suit, which makes them more attractive to consumers. These financial institutions do not levy overdraft fees:

• Alliant Credit Union
• Ally
• Axos
• Betterment
• Capital One
• Charles Schwab
• Citibank
• Chime
• Discover
• SoFi
• U.S. Bank
• Varo

What to Do If You Overdraw Your Account

Even if you take precautions, you may still overdraw. Act fast to deposit money in the account and contact customer service immediately. These two moves may help you get the overdraft fees waived — or at least avoid additional fees.  

1. Deposit Money in the Account Immediately

The fastest way to clear funds is transferring money from a linked savings account, which makes the money available immediately. You can also visit your bank in person to deposit cash.

Getting money in the account right away will help you avoid additional daily fees for being in the negative. It can also help you prevent additional overdraft fees if you have auto payments scheduled or checks on the verge of being deposited.

2. Contact Customer Service

If this is your first time overdrafting (or the first time in a long time), your bank may waive the fee if you speak to customer service. Remember to be polite, as the representative you speak to will likely be the one who can ultimately waive the fee.

If the representative cannot help you, you can always ask to speak to a supervisor or call back and try your luck with a different agent. You can also visit a local branch of your financial institution to speak to someone in person.

Timothy Moore covers banking and investing for The Penny Hoarder. He has worked in editing and graphic design for a marketing agency, a global research firm and a major print publication. He covers a variety of other topics, including insurance, taxes, retirement and budgeting and has worked in the field since 2012. Reporting from contributor Kent McDill is included in this report.

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