You can’t spend money you don’t have, right?
Well, that’s not necessarily true, and if you overdraw your bank account, you may be subject to costly overdraft fees.
Fortunately, there are some simple things you can to help avoid overdraft fees.
It’s also sometimes possible to negotiate your way out of overdraft fees even after they have been charged.
Here’s what you need to know about overdraft fees.
What Is an Overdraft Fee?
You may generally keep track of your money and have a good sense of how much is in your account most of the time, but mistakes can happen.
Every once in a while you might make a payment that is higher than your balance. Or, you might have a bill set up on autopay, and it gets paid out before you have enough deposited into the account to cover the bill.
Bank accounts often come with “overdraft coverage,” which means the bank will cover the charge and it will still get paid—and the recipient of the funds will be none the wiser.
Your account will then dip before zero and you’ll have a negative balance that reflects the amount you owe the bank for covering the expense, plus an overdraft fee, which is payment to the bank for the service (essentially a small “loan”) that it provided you.
What Is the Average Cost of an Overdraft Fee?
Overdraft fees aren’t cheap. The cost can vary somewhat depending on the bank or financial institution, but they generally run around $33.
It’s important to note that the overdraft fee is generally per overdraft. So if you overdraft your account, and don’t realize you overdrafted, you might make multiple purchases, and incur a fee on each one.
And these fees can add up quickly. At $33 a pop, just three small purchases could set you back over $100.
Some banks charge extended overdraft fees (sometimes called “continuous” or “sustained” fees), anywhere from $6 to $38.50, possibly on a daily basis, if your account doesn’t go back into positive territory within a few days.
It’s no wonder that Americans pay billions of dollars in overdraft fees each year.
Ways to Avoid Overdraft Fees
These strategies can keep overdraft fees from accumulating—or ever being charged in the first place.
Keeping an Eye on Your Balances
It’s a good idea to make a habit of checking your accounts weekly or even more frequently to make sure your balances aren’t too low.
This can be done quickly online, via mobile app, when you take money out of the ATM, and/or by calling the bank and getting an automated update on your account.
Maintaining a Cushion
One simple way to avoid overdraft fees is to keep a little more in your account than you typically spend each month in order to cover unexpected or forgotten charges.
Setting up Automatic Alerts
An easy way to help avoid unexpected overdrafts–and high overdraft fees–is to set up some automatic alerts.
One that is particularly helpful is a low balance alert, which means you will be notified (by text, email or cell phone notification) whenever your balance falls below a certain amount.
You could then immediately transfer money from savings, or hold off on making any purchases until another paycheck comes in.
Another useful alert you may be able to set up is the “overdraft” alert. This means you would be notified whenever you overdraft your account.
This alert won’t help you avoid the initial overdraft fee, but it could stop you from continuing to make payments and incurring more overdraft fees.
Opting Out of Overdraft Coverage
It is possible to prevent your bank from using the automatic overdraft. You just need to opt out of overdraft coverage.
Customers typically have to “opt in” to a bank’s overdraft protection program, which many do without thinking much about it when they open their accounts.
This gives the institution permission to clear a transaction even if there is not enough money to cover it in the account.
If you’re unsure about whether you’re enrolled in an overdraft program when you opened your account, you can contact your bank to find out whether you have this coverage or not.
If you have overdraft coverage, you may want to consider opting out. Without overdraft coverage for debit card purchases and ATM withdrawals, you will not be able overdraft.
Instead, if you try to withdraw more than you have in the account, your charge will simply be declined—no money will be withdrawn from your account, and no fees will be triggered.
Keep in mind, though, that opting out of overdraft coverage programs typically does not protect you from fees charged for bounced checks.
Linking to Another Account
Your bank or financial institution might offer an overdraft protection service that is different from overdraft coverage.
This service, which typically involves signing a contract to set up, will link your checking account to another account at the same institution.
Then, in the event that there’s not enough cash in your spending account to cover a transaction, the needed money would then be transferred from the linked account to cover it.
It’s important to remember, however, that most savings accounts have a limit of six withdrawals per month.
While there may be a fee involved for the funds transfer, these fees are typically lower than overdraft fees.
Another perk of overdraft protection is that it can help you avoid the awkwardness of having your transaction denied.
Being Careful About Where You Use Your Debit Card
You might want to avoid using your debit card to check into a hotel or rent a car. These companies may put a hold on your card equal to, or sometimes greater than, the full amount of your bill.
In this case, money wouldn’t actually be withdrawn from your account, but it also wouldn’t be available for you to use.
If you use your debit card to make another purchase and don’t realize that the hold is tying up your money, you may put yourself at risk for overdrafting.
If you’re planning to use your debit card to book a hotel or rent a car, you might want to check company policies in advance.
You may also want to avoid using your debit card to make lots of small purchases. These might be harder to keep track of and could add up quickly, making it more difficult for you to know how much money is flowing out of your account.
If you lose track of your spending, this too could put you more at risk for overdrafting.
What to Do If You Do Overdraft
If you overdraw your account, the best first step is generally to transfer money into the account right away. You might still be able to prevent an overdraft fee.
You may then want to see if your provider has a daily cutoff time, or deadline, for adding money to an account to correct a negative balance that same day to avoid fees.
Even if you miss the cutoff, transferring money into the account soon can prevent other fees. That’s because leaving a balance negative for several days can sometimes result in an extended overdraft fee.
If you are charged an overdraft fee, however, that doesn’t automatically mean you are stuck paying it. It doesn’t hurt to negotiate to try to have the fee reimbursed.
You can try to get overdraft fees waived by calling the bank and politely asking if they will remove the charge—if it’s your first offense, you might prevail.
You may also want to ask your bank if it has a formal forgiveness program. Some institutions have policies to waive the first fee charged each year or if a customer is experiencing economic hardship.
Overdrafting is when you try to spend more money from your checking account than you actually have in that account.
Banks will often let your charge go through instead of declining it, but then will charge you an overdraft fee northwards of $30.
These fees can add up quickly, especially if you don’t realize you overdrafted your account and continue to make purchases.
But there are a few simple ways to avoid hefty overdraft fees, such as opting out of overdraft coverage, setting up an automatic “low balance” alert, linking your accounts, and keeping a little cushion in your account.
Another way: opening a SoFi Money® cash management account. It offers no-fee overdraft coverage of up to $50, along with fee-free cash withdrawals at 55,000+ ATMs worldwide, no account fees, and no minimum balance.
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates is a bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.