Bank overdraft fees can zing you as much as $35 a transaction. If you have more than one overdraft before you replenish your account, the fees can add up quickly.
An “overdraft” happens when you withdraw funds from your checking account and you don’t have enough money to cover the transaction. Accounts can be overdrawn by checks, debit card purchases, ATM withdrawals, online and automatic bill payments, and direct debits from billers.
When a potential overdraft transaction is pending, the bank will either decline the transaction or let it go through and charge a fee. What does your bank do? It depends on the type of transaction, the bank’s policies, and whether you have “opted-in” for overdraft protection.
By law, your bank will cover ATM withdrawals and debit card purchases, with an accompanying overdraft fee, only if you have enrolled in its overdraft protection plan. If you have not opted-in for overdraft protection and you don’t have enough money in your account, your transaction will be declined.
If a check, online payment, or an automatic payment overdraws your account, your bank can choose whether to cover the payment and charge an overdraft fee, or whether to return the payment and charge a non-sufficient funds fee. Most banks have automated systems for making these decisions, and rules, policies, and fees vary from bank to bank.
Banks are not required to notify you when you a have low account balance or your payment has bounced.
According to a July 2014 study by the federal Consumer Financial Protection Bureau, while overdraft and non-sufficient funds fees comprise most of the checking account fees consumers pay, only eight percent of bank customers incur 75 percent of these fees. Who incurs overdraft fees? According to the study:
- Mostly young people aged 18 to 25 – although people over age 62 are not immune to overdrawing their accounts.
- People who regularly make numerous small purchases with their debit card.
- Consumers who have opted-in for overdraft protection.
If you regularly see overdraft fees on your bank statement, what can you do?
- Check with your bank. If you have opted-in for overdraft protection for ATM and debit card transactions, opt-out. If a transaction is declined, this could be annoying or embarrassing, but you avoid overdraft fees.
- Check your bank balance regularly. This is easy to do by phone, on-line, or with mobile phone applications.
- Enroll in your bank’s alert system. Set up alerts so the bank sends you a text message or e-mail whenever your account balance drops below an amount you have specified. Alert systems will also notify you when payments are being made from your account.
If you are paying overdraft or non-sufficient funds fees, take steps to prevent them. Otherwise, you are throwing money away.
