What is an overdraft fee? And how to get a refund

Overdraft charges to a personal checking account probably don’t worry about, say, Jeff Bezos. But it’s easy for the rest of us to lose track of how much money we have in our checking accounts and mistakenly make a purchase that exceeds our balance. And because of the way banks process transactions, even if you check your balance at a cash register, you can accidentally incur charges that overcharge your account and trigger overdraft charges.

What is an overdraft fee?

Overdraft fees are a penalty that a bank or credit union may charge you when you use a check or debit card to spend more money than you have in your checking account. Automatic payments to credit cards, utilities, or other businesses may also result in overdraft charges. Your bank will automatically deduct these fees from your checking account, just as they do with regular account maintenance fees.

Not all overages result in overdraft fees. Many banks won’t charge you if your account is only short by $5 or more. And overdraft fees are only assessed when the bank or credit union actually pays the fees that put you in the red.

Some institutions do not allow overdrafts on all or part of their current accounts. Instead, they refuse to pay the fee you’re trying to charge, and they charge an “insufficient funds” (NSF) fee. A bank’s NSF fee is often about the same amount as its overdraft fee, but the NSF fee can cause a lot of trouble and potentially cost you more than the overdraft fee.

For example, suppose you write a check for more than your balance at the time the check clears. In addition to your bank’s NSF check fee, the merchant you attempted to pay may respond by charging you a returned check fee. If the merchant is a credit card company, you may also be hit with late fees plus a punitive interest rate. And your credit report may reflect a late payment, which could lower your credit score and increase your cost of borrowing for years.

Unlike maintenance fees which only apply once a month, you may be charged overdraft fees for every purchase you make while your balance is below $0. So if multiple checks or debit card payments clear on the same day, your account balance hits its lowest point, you could end up paying multiple overdraft fees.

Such is the financial life. And overdraft fees are, at least right now, a major fact of life. Moebs Services, a firm specializing in economic research, found that banks, credit unions and fintechs collected $33.4 billion in overdraft fees in 2021. That’s a big change, but it’s considerably less than what Americans paid in 2012: about $40 billion after adjustment. for inflation. And this downward trend is expected to continue as more and more financial institutions no longer charge overdraft fees.

How much are overdraft fees?

Overdraft fees vary by bank, but currently average about $25 per occurrence. In other words, you will pay a separate fee for each transaction that exceeds your balance. As noted above, if a series of charges hit your account all at once, the day after a holiday, for example, overdraft fees can add up quickly.

You may find that online banks charge significantly lower overdraft fees than traditional banks. The 2021 Forbes Advisor Current Account Fee Survey found that the average overdraft fee at traditional banks and credit unions was $29.50, while online banks charged an average of $16.98.

Why do banks charge overdraft fees?

Legend has it that the first overdraft fees were charged in 1728. It was then that an Edinburgh merchant convinced the Royal Bank of Scotland to let him pay the right to temporarily spend more money than he had on his account. Since then, banks have generally granted customers the right to charge fees that exceed their account balance.

Banks and credit unions don’t have to. In fact, under federal law, they’re not allowed to process debit card purchases that exceed your available balance unless you’ve signed up for the financial institution’s overdraft protection service and you have accepted the accompanying fees.

Overdraft fees can be seen as a way to compensate financial institutions for the risk they take by allowing customers to spend money they don’t have, at least for now. These fees are an important source of revenue for many financial institutions and therefore also benefit banks.

How to get reimbursed for overdraft fees

If you’ve been the victim of overdraft fees, you may not have to pay them. The solution may be as simple as requesting a refund. You can ask in person at the bank counter, over the phone with customer service, or even via email or an online chat session. Many banks are understanding and for the most part know the value of helping customers with this issue. Chances are, when it comes to getting a break on overdraft fees, ask and you shall receive.

If you have a mitigating circumstance, it can’t hurt to include it in your application. It could be illness, a late payment, a load that landed earlier than expected, or an automatic credit card payment that turned out to be heavier than expected. And it never hurts to mention that you’re a loyal customer who doesn’t frequently exceed your account.

If the customer service representative claims not to have the authority to waive the charge, ask to speak to a supervisor or other decision maker. If you are calm, reasonable and persistent, you have a good chance of getting the fee waived.

What if, when all is said and done, they don’t waive the fee? You may want to consider switching banks. Banks publish their overdraft fee policies and procedures, and you can probably find one that’s nicer or doesn’t even charge overdraft fees.

If you feel you have been treated poorly, consider complaining to regulators. The Federal Deposit Insurance Corporation (FDIC), a government agency that protects consumer bank deposits from loss, has a hotline (877-275-3342) you can call to find out how to contact the federal regulator. from your bank. It probably won’t reimburse your costs, but it may help you feel better.

How to avoid overdraft fees

There are many ways to avoid or limit overdraft fees. You may be able to link a savings account to your checking account so that your bank or credit union will withdraw funds from your savings if your checking balance drops to zero. Many banks offer overdraft protection that works like a line of credit, so you take out a small loan to cover overdraft amounts. In some cases, you may be able to connect your checking account to a credit card to achieve a similar effect.

You can also monitor your account carefully to avoid overdrafting. It’s easier with the nearly universal ability to check balances and transactions from a smartphone. But remember that you can always make miscalculations because you never know exactly when the charges will arrive at your bank. And banks don’t have to alert you if you’re overdrawn and racking up fees.

However, if you monitor your balance daily, you may be able to dodge charges even if you accidentally overspend. By making a deposit the same day a transaction sends your balance below $0, you may be able to narrowly avoid an overdraft fee if the deposit clears before the pending purchase. But banking policies vary in situations like this, so don’t rely on this tactic to work with every financial institution.

Another strategy is to keep more money in the account so that an overdraft is unlikely. This goes against a lot of personal finance advice, which argues that excess funds should earn interest rather than serve as a way to avoid fees. And now that interest rates are rising, you might be tempted to limit the amount of money in your checking account.


One day, in the not too distant future, it is conceivable that overdraft fees will end their nearly three-century run. Until then, if you were asked to pay for one, the remedy is often refreshingly simple: just ask if, this time around, you can get a pass.

Frequently Asked Questions (FAQ)

How many times can I overdraw?

Although not all banks follow the same practices, your bank probably does not limit the number of times you can overdraw your account. However, your bank may cap the dollar amount of an overdraft it will pay.

How long do you have to repay an overdraft?

This varies by bank, but you usually have five business days to deposit enough money into your account to cover the overdraft. Beyond that, the bank may charge you additional overdraft fees.

Are overdraft fees hurting your credit?

Credit bureaus don’t monitor overdraft fees, so paying one won’t affect your credit score.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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