The $450 Reason to Avoid Overdraft Coverage

Overdrafting on your checking account can result in more than one fee. Here are the fees you should look out for when you overdraw your account.

If you often try to spend more than what’s in your checking account, don’t let your bank pick up the shortfall. Doing so can cost hundreds of dollars a year in overdraft fees, according to a report from The Consumer Financial Protection Bureau.

Banks will cover the difference for a transaction that exceeds the available amount in your checking account. But that service, called overdraft coverage, isn’t free. In fact, it’s a big money-maker for banks and ends up costing you about $30 per overdraft.

The good news is you can avoid some of these fees. Banks can’t automatically cover your overdrafts on ATM withdrawals and debit-card transactions unless you enroll in the coverage. (This doesn’t apply to online bill payments or checks, which can be automatically covered with no opt-out options.)

The savings from declining overdraft coverage can be significant. People who enrolled in the coverage—and used it frequently—paid $450 more in fees a year versus those who didn’t elect the coverage, but frequently overdrew their accounts, the CFPB found.

The bureau is encouraging banks to provide easier-to-read, one-page disclosure forms explaining when overdraft fees can be charged. The CFPB has released a handful of prototypes But rather than wait for banks to offer better disclosures, here’s what you need to know to navigate overdraft and related fees.

Overdraft fees: This fee occurs any time your bank approves a transaction that exceeds the amount of money you have available in your checking account. Usually, if you overdraw less than $5, your bank won’t charge the fee. Banks automatically cover overdrafts from online bill payments or checks, but need your okay ahead of time to cover overdrafts from ATM withdrawals or debit card transactions.

Overdraft limits: Banks and credit unions usually limit the number of overdraft fees they charge in one day. The typical maximum is between four and six overdraft fees in one day per account. Overdraft coverage caveat: Your bank doesn’t have to cover every overdraft, even if you have authorized them to do so. Paying an overdraft is always at the bank’s discretion.

NSF fee: Banks charge a nonsufficient funds (NSF) fee when it rejects a transaction that would overdraw your account. While overdraft and NSF fees often are the same amount and appear the same on your schedule of fees, NSF fees may not always count toward your daily overdraft maximum.

Extended overdraft fee: Also called a sustained overdraft or extended overdrawn balance fee, this fee is charged when you have a negative account balance for an extended time. Typically, you have 5 business days or 7 calendar days to get a positive balance before the bank charges this fee. Depending on the bank, you may be charged this fee as much as once a day or once every five days until your account balance is above zero.

Overdraft protection fee: Banks and credit unions often offer overdraft protection plans which link your checking account to a savings account or credit card. If you overdraw on your checking account, money in these accounts will be transferred to your checking account to avoid triggering an overdraft or NSF fee. While some online banks offer this service free, other institutions usually charge $10 to $12.50 per transfer, which is significantly less than an overdraft or NSF fee. The downside of overdraft protection is that you can accidentally drain your savings or run up a credit card balance if your bank doesn’t alert you every time it executes an overdraft transfer.

Avoid overdraft fees altogether: The best way to protect yourself is to understand the fees your bank charges for overdrawn accounts and to make sure you’ve opted out of coverage for ATM withdrawals and debit card transactions. Check the fine print for other overdraft policies.

Otherwise, track your payments when you have low balances. Many banks have apps that allow you to check balances on your phone, in real time. And remember to allow enough time for checks and other deposits to clear before spending that money.

Janna Herron

Janna is a former Senior Writer at ValuePenguin covering banking, credit cards and credit scores. She has spent more than a decade writing and reporting on personal finance, real estate and business, and has received three journalism awards for her work.