The Lowdown on Overdraft Fees (that your bank won’t tell you)

Being told your payment is declined can be embarrassing and stressful. That’s why it’s easy to understand the appeal of overdraft protection. Overdraft protection provides you with assurance that your payments will process, even when you don’t have enough money for them. But how much does having this peace-of-mind cost you, and is it worth it? Read on to learn more.

What is overdraft protection? 

Most banks and credit unions offer overdraft protection services to their account holders. When you enroll in overdraft protection, you give your bank permission to give you a short-term cash advance, kind of like a payday or short-term loan, to cover payments (such as debit card purchases or automatic payments) you make that you don’t have enough money in your account to cover. In exchange for the advance, your bank will charge you an overdraft fee, commonly referred to as a “courtesy“ or “paid item” fee or “returned payment” fee. As a result of this, your account balance will be left with a negative balance and your account will be considered to be in “overdraft.”

This is what overdraft protection looks like in its simplest form, but there are other fees associated with overdrafting your account that you should be aware of. Let’s break some of these down.

What different types of overdraft fees are there?

• Overdraft fee: When a bank allows a transaction to process that exceeds the amount of money available in your bank account, they charge you an overdraft fee in exchange for covering the transaction for you. This can also be referred to as an overdraft loan or line of credit or an overdraft item fee.
• Non-sufficient funds (NSF) fee: When your bank declines a payment you’ve made that you don’t have enough money in your account to cover, they may charge you an NSF fee. With NSF fees, you are also at risk of being charged additional late fees or returned payment fees because your payment was not processed.
• Overdraft protection or transfer fee: Some banks may have an overdraft program that allows you to link a secondary account, like a savings account or line of credit, to your checking account. When you make a payment that exceeds the amount available in your checking account, money from the linked account is automatically transferred to your checking account to cover the expense. Some banks charge a fee for this transfer.
• Continuous/Extended/Sustained/Recurring overdraft fee: When an account remains negative over an extended period of time, some banks charge additional fees. Commonly used terms for these fees are “sustained,” “continuous,” or “extended” overdraft fees. The extended period of time could vary from anywhere between 3-10 days, so it’s important to know your bank’s specific terms.

Average costs of overdraft fees? How much do people pay on average? What does that come out to in terms of APR?

Overdraft fees vary widely by institution. According to a 2019 NerdWallet study, the country’s largest banks charge an average overdraft fee of $35, while credit unions charge an average of $25. This may not seem like a big deal, but when you look at it in terms of how much interest you actually end up paying, the numbers are alarming. 

According to the Consumer Financial Protection Bureau (CFPB), most debit card overdraft fees are caused by card transactions of $24 or less, and they’re typically repaid within three days. “Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent annual percentage rate (APR).” That’s actually way higher than a payday loan or friendly alternatives such as a Possible loan.

58% of the banks surveyed in NerdWallet’s study also stated that they charge continuous overdraft fees for accounts that remain negative for several days, like maintenance fees. So, let’s say you don’t get paid for another 10 days and your bank also charges a $35 continuous overdraft fee. This means that the $105 you’ve already spent on fees just increased to $140. If you’re living paycheck to paycheck, having $140 automatically deducted from your next check in fees alone can really put you in a bind and starts your debt cycle over again. 

Why do banks charge overdraft fees and how much do they make on overdraft fees? 

Consumers are led to believe that banks provide overdraft coverage as a “service” or “courtesy,” assuring them that their payments will be processed. Some banks even call it an overdraft privilege! Consumers are also led to believe that banks charge overdraft fees to prevent negative behavior. While there is some truth to these ideas, a big part of the equation is missing. What consumers aren’t told is that charging overdraft fees is an easy, low-risk way for banks to rake in a lot of money with minimal effort. 

So, just how much money do banks make on overdraft fees? In 2017 the Center for Responsible Lending reported that according to data collected by the Federal Deposit Insurance Corporation (FDIC), the nation’s largest banks collected more than $11.45 billion in overdraft and non-sufficient funds (NSF) fees. If data were also collected on smaller banking institutions and credit unions, the FDIC estimates that his number would be around $15 billion. That’s a huge amount consumers pay!

Laws and regulations around overdraft fees

In the past, banks and credit unions were able to enroll their account holders in overdraft coverage automatically without providing them a way of opting-out. Consumer groups found these practices troubling and lobbied for change. They were victorious in 2010 when the Overdraft Protection Law went into effect. 

Under the Overdraft Protection Law, banks and credit unions are now required to decline ATM withdrawals and debit card transactions that exceed an account’s available balance by default. Banks can still offer overdraft protection plans, but consumers must opt-in and authorize the service. Banks are also required to provide clear information about the associated fees, and a way for consumers to opt-out of the service.

In the years since the Overdraft Protection Law went into effect, overdraft protection continues to be a hot topic debated between consumer groups, regulators, and the banking industry. Since the FDIC began collecting and distributing data about large banks’ overdraft-related fees in 2015, the Courthouse News Service reports that regulators began paying more attention. 

Since then, bills like the “Stop Overdraft Profiteering” bill have been introduced to Congress by US Senators Cory Booker (D-N.J.) and Sherrod Brown (D-Ohio) in 2018. The bill aimed to limit the amount of overdraft fees and ban them altogether for point-of-sale and ATM debit transactions. It also aimed to encourage banks to expand on small-dollar loan offerings in lieu of overdraft fees. 

Yet on the other end, the banking industry has argued that the Overdraft Protection Law needs an update, and just In May of 2019, the Washington Post reported that President Trump’s administration was in the process of reviewing the law and could potentially choose to overturn them. 

How to prevent overdraft fees

In today’s world, it’s no longer common to balance a checkbook or use cash for purchases, so while you’re swiping your debit card, it can be easy to overlook your account balance, overspend, and get hit with overdraft fees. That being said, overdraft fees can be really damaging to your financial health so prevention is key. Here are some things you can try: 

• Opt-out of overdraft coverage – Overdraft coverage is optional and you can choose to opt-out at anytime as the account holder. If you choose to opt-out, transactions you don’t have money in your account to cover will be declined and you won’t be responsible for repaying a fee. 
• Link a secondary account – Many banks allow you to link a savings account or line of credit or another money market deposit account to your primary checking account. When a transaction processes that exceeds the amount available in your checking account, funds from the secondary account will be automatically transferred. Some banks even offer overdraft line of credits for this specific reason. The rates on lines of credit are often much more affordable than overdraft fees. However, make sure you know your bank’s transfer fee or find a bank that doesn’t charge a transfer fee. 
• Sign up for low balance alerts – Many banks now offer to text or email you when your checking account balance is low. If your bank offers this service, sign up for it! This way if you get an alert, you know it’s time to curb your spending. 
• Track your balance carefully – Sign in to your account’s mobile banking site to track your balance daily. It may also be useful to use a paper system, a spreadsheet of some sort, or apps like Mint and EveryDollar to make sure you stay on top of your budget. If you share your checking account with a spouse or a partner, make sure you communicate regularly about what’s coming out and going in so you’re both on the same page. 
• Know when your deposits will become available for use – Know your bank’s holding policies. When you make a cash deposit, the money will be available immediately for use. However, when you deposit a check, it may be subject to a hold. Being aware of the difference between your “account balance” and your “available account balance” is important.
• Use cash – One surefire way to assure you don’t overdraft is to use cash for spending. Automate your bills and assure you leave enough money in your checking account to cover those fixed expenses, but take out a lump sum of cash each paycheck for spending. 
• Find a new bank – The banking industry is changing fast, and many of the new players do not charge overdraft fees and have free overdraft. Everyone’s banking needs are different, but it may be worth looking into banks like Chime and Varo, to see if they could work for you. 

Alternatives to overdraft fees

If you’ve tried to manage and prevent overdraft fees on your own and you’re still finding yourself running into them more than you’d like to, don’t fret! There are plenty of alternatives options that could be helpful: 

• Possible: Apply for a loan of up to $500 on the Possible app via the iTunes Store or Google Play Store and repay it over time! Our rates are much more affordable than your bank’s overdraft coverage and a good credit score isn’t required to apply. In addition to providing money to consumers who need a few extra hundred to make it to their next payday, Possible reports to 2 credit bureaus, giving customers the opportunity to establish or build credit history.
• Other cash-advance apps: Aside from Possible, there are other cash-advance apps that may fit your situation better. Apps like Dave, Earnin, and Brigit will also lend you small-dollar amounts ranging from $75-$500 at rates more reasonable than your bank’s overdraft fees. They each charge differently whether it’s a monthly membership fee, a borrowing fee, or an optional tip. Look closely at each of their terms to figure out which one will work best for you. 
• Personal assistant apps: Apps like Trim, TrueBill, and Harvest Platform will look through your bank data to find overdraft-related fees they can negotiate on your behalf. Whether it’s by sending an email or letter to your bank, or getting on the phone with them, they’ll take care of it for you and get you your money back. Each of these apps are free to download, but they’ll usually charge a percentage of the amount they save you. 
• Credit Cards: Rather than using your bank’s overdraft services as a loan when you’re low on funds and need to take care of expenses, consider using a credit card for those transactions instead and paying off the balance as soon as possible. The average APR interest rates on a credit card is much lower than your bank’s overdraft fee at 21%. 
• Payday loans: Some consider payday loans as the most exploitative financial option out there. But even payday loans may be a better option than relying on your bank’s overdraft protection. Just be sure that if you use a payday loan you repay it on time. Otherwise you could get stuck in an endless debt cycle.

What happens when you’re charged an overdraft fee? Process to dispute it? 

When you’re charged an overdraft fee, your account will be in “overdraft” or at a negative balance. Until you’re able to make a deposit to bring the account back to a positive balance, it’s important that you stop using the account to make any other payments. Overdraft fees are charged per transaction, so continued use of the account when it’s in overdraft could be really damaging. Try to bring your account back into good standing as soon as possible.

It’s also important to remember that overdraft fees are negotiable, so if you were charged an overdraft fee you could call your bank or go into a local branch to ask if they’ll consider reversing the fee. Banks are willing to reverse overdraft fees more often than you think, especially if you’re a long-time customer, you don’t overdraft frequently, or it’s your first time calling in to request a fee reversal.  

If you overdraft often or you’re a new customer without a lot of history, it can be trickier to get the fee refunded, but that doesn’t mean it’s not doable. Banks are aware of their competition and they don’t want to lose your account. There are a lot of resources online that give pointers on having these conversations with your bank. 

What happens if you overdraft multiple times? How negative can your account go?

The scary thing about overdraft fees is how quickly they can add up. Because overdraft fees are charged per transaction, a single day of swiping your debit card without realizing you’re in overdraft could dig you into a hole. 

Some banks put limitations on the amount of transactions they’ll allow each day while an account is in overdraft, but even with limitations in place, it’s still easy to get into a really tough situation. Let’s say your bank’s overdraft fee is $35 and their limit overdraft transactions to four per day. If you make four purchases or payments on a single day, that’s $140 in fees alone that you now owe. This doesn’t include the amounts of the transactions themselves. 

If you find yourself in a situation like this, call your bank immediately to see if they’ll reverse some or all of the fees and set you up on a payment plan to get the checking account balance back into the positive while still allowing you to pay your other bills. 

If it’s possible, you’ll also want to avoid allowing your account to stay negative for too long. Banks can close accounts that stay negative for too long and report them to ChexSystems, a consumer reporting agency that reports on closed checking and savings accounts. If your account has been reported to ChexSystems, it could prevent you from being able to open a new checking account for at least five years according to Bankrate. 

Another thing to consider is that if you don’t take care of the negative balance within a reasonable amount of time, your bank can send the outstanding balance to a collection agency. The collection agency will likely report the account to the credit bureaus. It takes seven years for an account that went into collections to be removed from your credit report, even after you’ve paid it off.  

If you need more advice, check out this great article by The Balance that provides detailed steps on how to recover from an overdrawn bank account. 

Where to go if you think the overdraft fee was unfair? How to complain to regulators?

If you feel like your bank was unfair in charging you an overdraft fee or they were misleading in communicating their overdraft protection services, you should make them aware of this and try to work it out with them first. 

If you have exhausted all efforts with your bank and they aren’t budging, you can file a complaint against them. You’ll first need to find out which government agency oversees your bank so you know where to file your complaint. This can be difficult to find, but you can start by using the Federal Reserve System’s financial institution search tool. You can also file a complaint with the Consumer Financial Protection Bureau (CFPB). 

Filing a complaint doesn’t necessarily mean that the fees will be refunded to you, but getting a government agency onboard increases your chances of having the issue resolved. 

If you’re unhappy with the findings of the investigation or you want more done, you can hire an attorney to file a lawsuit against the bank. However, it’s likely that the fees you’re trying to get back are much less than the cost of a lawsuit. If the issue you’re dealing with has potentially affected other account holders, you could get together and consider filing a class action lawsuit. A quick Google search can also bring up current class action lawsuits against your bank. If any of these pending lawsuits are for reasons similar to your own, you can request to join the lawsuit by contacting the attorney.