When you spend more money than you have available in your bank account, that account goes into a state of negative balance, called overdraft. You can overdraw your account by writing checks, swiping debit cards, withdrawing cash at ATMs and setting up automatic debit card or ACH payments. When these many modes of spending draw money from a single account, you can quickly lose track of your balance and end up facing an annoying and even dangerous amount of fees.
Overdraft Fees by Bank
We examined the four fees associated with overdrafts at 16 of the largest U.S. retail banks. Here are the typical fees charged by the largest banks in the U.S.
|Bank Fee:||Overdraft/NSF||Overdraft Protection||Extended Overdraft|
|Wells Fargo Bank||$35.00||$12.50||$0.00|
|Chase Bank||$34.00||$10.00||$15.00 every 5 days|
|Bank of America||$35.00||$12.00||$35.00 every 5 days|
|US Bank||$36.00||$12.50||$25.00 weekly|
|PNC Bank||$36.00||$10.00||$7.00 daily|
|SunTrust Bank||$36.00||$12.50||$36.00 every 5 days|
|The Huntington National Bank||$37.50||$0.00||$25.00 every 5 days|
|TD Bank||$35.00||$10.00||$20.00 every 10 days|
|Fifth Third Bank||$37.00||$12.00||$0.00|
|KeyBank||$34.00||$10.00||$28.50 every 5 days|
|Citizens Bank||$35.00||$12.00||$30.00 every 3 days|
|M&T Bank||$38.50||$12.50||$38.50 every 5 days|
The Four Types of Overdraft Fees
While most banks charge similar amounts for each fee, they sometimes apply slightly different rules to the way each fee works and when it is charged. The multiple fees involved in an overdraft represent some of the highest checking account fees that banks charge. Besides the standard overdraft fee, you may encounter the nonsufficient funds (NSF) fee, the overdraft protection fee and the extended overdraft fee.
The most obvious fee involved in an overdraft is the simply-named overdraft fee, which occurs each time the bank approves a transaction that exceeds your available balance. Typically, banks do not charge the overdraft fee when you overdraw by less than $5.
Every bank and credit union has its own limit on the number of overdraft fees it will charge in one day. You can commonly expect banks to charge a maximum of 4 to 6 overdraft fees per day per account, though a few outliers do allow as many as 12 in one day.
The nonsufficient funds (NSF) fee occurs each time the bank chooses to reject a transaction that overdraws your balance. Practically every bank charges the same amount for overdraft and NSF fees, and the two are often printed as one figure in your schedule of fees.
Since a bank must choose between approving and declining an overdraft, a single overdraft will cost you either an overdraft fee or an NSF fee, but never both. However, a few banks do distinguish between the two fees when they count up the daily maximum. U.S. Bank, for example, will only charge up to 4 overdraft fees per day, but counts the limit on NSF fees separately, so that you can end up paying eight separate penalties in a day.
Overdraft Protection Fee
Also called the overdraft transfer fee, the overdraft protection fee is charged for every time the bank arranges a transfer from another one of your accounts —usually a savings account —to cover the overdraft. Legally, banks cannot include overdraft protection as an automatic account service, so customers must opt into activating the feature.
Online banks often provide overdraft protection for free, but if you are at a standard bank, you can expect to pay anywhere from $10 to $12.50 per transfer. While this can save you money in comparison to paying overdraft or NSF fees, if the bank's policy does not include mandatory notifications for each overdraft transfer, you can end up draining your savings before you realize what's happening.
Extended Overdraft Fee
The final fee in the arsenal of overdraft penalties is the extended overdraft fee. This fee is sometimes called a sustained overdraft or extended overdrawn balance fee, and it comes into play when you leave your account balance in the negative for a certain number of days. In most cases you have 5 business days or 7 calendar days to fix your balance before the extended overdraft fee takes your account even deeper into the red.
Some banks charge this fee once every 5 days, while others go so far as to assess the fee every day until you bring your balance back above zero. The maximum number of extended overdraft fees you can incur varies by bank.
Avoiding Overdraft Fees
How do you avoid overdraft fees? The simplest answer is to avoid spending more than you have available, but mistakes do happen. If you're starting from scratch, avoiding overdraft fees begins with picking a good checking account with a generous fee policy. If you're not looking to switch or open a new account, here are a number of practices you can adopt to minimize your chances of being surprised by an overdraft.
Track Your Balance
These days, mobile banking apps have become commonplace, and one of their basic functions is to let you know the state of your account balance. By familiarizing yourself with your bank's app and making a habit of checking that number on a regular basis, you should be able to gauge how much you can afford to spend at any given moment.
If checking your balance on a schedule is too much of a commitment, you can minimize the effort required by doing so only before major purchases. However, you should remember that if you have any automatic transactions set up, such as bill pay or transfers to savings accounts, you may not get the chance to manually check your balance before the transaction occurs.
Know the Timing and Ordering of Transactions
One of the most common ways overdrafts happen is when a customer draws on money that has not yet arrived in the account. The problem here has two parts: processing order and deposit availability. Banks follow a specific order when they apply deposits and withdrawals to your account balance. They also have rules about how quickly you can access money, depending on the method you use to transfer it into your account.
Generally speaking, you can expect cash deposits, direct deposits and incoming wires to process before withdrawals in the same day, so as long as you are depositing enough money to cover the day's expenses, you should be safe from an overdraft situation. However, you should know that checks require at least one full business day to show up in your balance. Depending on many different factors, including the size of the check, the point of origin and your account history, the bank may take as long as a week to make the full amount available.
Read the Fine Print
You should make an effort to understand your bank's overdraft policies. The deposit account agreement and personal schedule of fees you receive when you open your account should cover fee limits, recurring fees and other quirks in the bank's rules. You can obtain extra copies of these documents either online or directly through your bank.
These are a few of the points you might want to investigate:
- Does the bank notify you when an overdraft occurs, or is the overdraft fee a "silent" charge that might end up surprising you?
- Does the overdraft fee apply only to written checks and automatic transfers, or does it also cover debit card swipes and ATM withdrawals?
- How long can your account stay overdrawn before the extended overdraft fee kicks in, and how long before that fee is charged a second or third time?
If you cannot find the answers to such questions in the documents, you should ask a bank representative by phone or in person to clarify your situation.
Use Overdraft Protection with Caution
Overdraft protection is not a way to avoid fees, but with careful management it can help you reduce them: paying the typical $10 to $12.50 per protective transfer is still preferable to getting hit with a $35 overdraft or NSF charge. In addition, using overdraft protection will ensure that your transaction is not rejected, as it may be if the bank decides to decline a normal overdraft.
However, overdraft protection services can be costly if you overuse them. The service itself costs a fee each time it is activated, and you are also spending money out of your savings account or a line of credit to cover the overdraft. In extreme cases, you may even run into savings account fees: use overdraft protection more than 5 or 6 times in a month, and the bank may charge you a penalty for exceeding the federal limit on savings account withdrawals.
Banks are legally required to offer overdraft protection as an opt-in service rather than an automatic feature, so if such an arrangement appeals to you, you will need to contact your bank to set it up.