Banks charge overdraft fees when account holders spend more than they have. The bank may approve those charges despite a lack of funds in your account, but for a fee. If you make multiple purchases with a negative balance, the bank will charge an overdraft fee multiple times.
The median overdraft fee in the U.S. is $35, according to Pew Charitable Trusts. So just a few purchases beyond your balance, and you can pay more than $100 in fees alone. While credit unions are often viewed as being more consumer-friendly than traditional banks, their overdraft fees have been on the rise in a big way. The best credit unions on average charge $9 less than national and regional banks.
In 2017, consumers paid $34.3 billion in overdraft fees, which was the most since the Great Recession.
One option consumers have to avoid these fees is called overdraft protection, which is different from overdraft coverage. Overdraft protection allows consumers to link a certain number of eligible accounts to their checking account. Then, if they overdraft their primary account, funds are automatically transferred from one of these other accounts.
This could include a savings account, another checking account or even a line of credit. With overdraft protection, there are still transfer fees, but they’re significantly lower than overdraft coverage fees.
If a consumer doesn’t have overdraft coverage or protection and they spend more than what’s available in their account, their transaction will be declined, and there will be no fee.
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The Bank Overdraft Fees Law
The Overdraft Protection Law made a change in banking. Before this law, banks would automatically enroll customers in overdraft coverage. This meant that customers were automatically responsible for overdraft fees, rather than deciding whether or not to have their transaction declined if they had insufficient funds.
The Overdraft Protection Law stopped automatic enrollment in these overdraft coverage programs. Now, the default setting requires that these transactions are declined. The law dictates that along with a change in default settings, customers can opt in or out anytime they want.
The law applies only to transactions that are not preauthorized, such as a debit card or ATM transaction. Pre-authorized withdrawals, which includes automatic bill payments, aren’t covered by the Overdraft Protection Law.
The Bank Overdraft Fees Law was enacted in part because research showed overdraft fees were most likely to impact people making less than $30,000 a year and living paycheck-to-paycheck.
Overdraft Coverage Opt-In
If you opt out of overdraft coverage, your financial institution can’t charge you fees on overdrafts for ATM or debit card transactions. Even though overdraft coverage is an opt-in situation, many people don’t realize it. The federal law requires it be optional, and opting out can save you quite a bit in money.
Research shows that opting out of overdraft coverage can save many account holders hundreds of dollars a year. That’s money that can be put toward other financial goals.
If you have opted out of coverage and you try to spend more than what’s in your account, your transaction will simply be declined, with no fees. If you don’t know whether you’ve opted in of overdraft coverage, contact your bank. By law, you can opt-out anytime.
5 Key Ways to Avoid Overdraft Fees
Paying extremely high fees on transactions isn’t an ideal financial option, but neither is having your transaction declined by the merchant. Here are five steps you can take to avoid overdraft fees:
- Keep track of automatic payments. Sometimes people forget about their automatic payments when they think of their overall balance. Try to keep ahead of any upcoming automatic withdrawals that will be drafted from your account.
- Sign up for alerts with your bank. These notices can let you know when your account balance drops to a certain threshold.
- Opt out of overdraft coverage. While complete coverage can come with high fees, consider overdraft protection linked to another account.
- Use a budgeting app. Apps like Mint help you monitor all of your accounts. You can also use an app like Mint for alerts on your accounts.
- Consider using a prepaid debit card. Prepaid cards have the same functionality as debit cards linked to a checking account but without the risk of overdrafts.
No one enjoys paying overdraft fees, but consumers can put protections in place. Account holders always have the option of opting-out of overdraft coverage, which can quickly get expensive.
Additional articles on overdraft fees for those who use Wells Fargo or Chase: