How Overdraft Fees Work, and How to Avoid Them

An overdraft happens when you spend more than is in your checking account and the bank pays the difference anyway. The bank is lending you money for a few days. The overdraft fee is what it charges for that loan.

What counts as an overdraft

Your account balance goes below zero. That can happen from a debit card purchase, an ATM withdrawal, a check, or an automatic payment such as a gym membership or a utility bill.

If the bank lets the payment through, that's an overdraft, and you may be charged a fee. If the bank refuses the payment instead, that's a returned or declined item. Some banks charge a non-sufficient funds (NSF) fee for that, though many large banks have stopped.

The fee itself

Most large banks that still charge overdraft fees set them somewhere between $10 and $35 per item. Some cap how many they will charge in a day. A few big banks, including Capital One and Citi, dropped overdraft fees entirely in 2022.

The fee is per transaction, not per day. Three small card purchases while you are overdrawn can mean three fees.

The opt-in rule for debit cards and ATMs

Under a federal rule called Regulation E, a bank cannot charge you an overdraft fee on a one-time debit card purchase or an ATM withdrawal unless you have opted in to overdraft coverage for those.

If you have not opted in, the bank declines the card at the register instead. That is usually the better outcome: an awkward moment at checkout costs nothing, and a $4 coffee that triggers a $35 fee costs a lot.

The rule does not cover checks or automatic bill payments. Those can still overdraw your account and draw a fee whether you opted in or not.

To check: look in your banking app under account settings for "overdraft coverage" or "debit card overdraft," or call the bank and ask whether you are opted in.

Five ways to stop paying the fee

1. Opt out of debit card overdraft coverage. This removes the most common source of fees in one step.

2. Link a savings account. Most banks offer overdraft transfer: if checking runs short, the bank pulls from your linked savings. Some charge a small transfer fee, and many charge nothing.

3. Turn on low-balance alerts. Set a text or push alert for when your balance falls below an amount such as $100. It gives you time to move money before a bill clears.

4. Know when your bills and paycheck land. Overdrafts often happen when an automatic payment clears a day before payday. Moving a bill's due date by a few days can end a recurring fee.

5. Switch to an account that declines instead. Many online banks and fintech accounts do not charge overdraft fees at all. Some offer a small fee-free buffer, often $20 to $200, once you have direct deposit set up.

If you have already been charged

Call the bank and ask for the fee to be refunded. Banks often waive a first fee, or a fee on an account with a good history, when you ask. Be polite and specific: the date, the amount, and that you have set up alerts so it does not happen again.

FAQ

Does an overdraft hurt my credit score? No. Checking account activity is not reported to the credit bureaus. It can become a problem if you leave a negative balance unpaid long enough for the bank to close the account and send it to collections, or to report it to ChexSystems, which other banks check when you apply.

What is the difference between an overdraft fee and an NSF fee? An overdraft fee is charged when the bank pays the transaction. An NSF fee is charged when the bank declines it.

How long do I have to bring my account back above zero? It varies by bank. Some give you until the end of the business day. Others add an extended overdraft fee if the balance stays negative for five to seven days. Your account agreement lists the exact terms.