3 Ways to Avoid Overdraft Fees

When payments or purchases exceed the available balance in your checking account, you’re left with a negative account balance and your account is considered overdrawn. Banks often temporarily cover the difference so your payments can be processed seamlessly, but they charge you an overdraft fee for the service.

If you continue making payments or withdrawals while your account is in the red, you’ll likely be charged fresh overdraft fees for every transaction. At around $35 per transaction, overdraft fees can be steep, and they add up quickly. Some banks may also charge daily overdraft fees: daily charges to your account that continue for as long as your account balance is negative.

The good news is that consumer protections may reduce overdraft fees in the coming months. But you can actively take steps to avoid these fees altogether.

Opt out of overdraft services

Most people can easily opt out of overdraft protection using their mobile banking app. You can also call your bank’s customer service team for telephone assistance. Once you’ve opted out, you will not get coverage for emergency withdrawals or unplanned payments. Note that banks can still charge overdraft fees for checks and recurring electronic payments even if you have opted out of overdraft.

Banks that let account holders opt out of overdraft fees for checks and recurring electronic payments may levy a non-sufficient funds fee (NSF) when someone’s account has insufficient funds. The merchant may also add a returned item fee. Learn about your bank’s overdraft policies and NSF fees before opting out of all overdraft protections.

Get overdraft protection through a linked account

Account holders who want the benefits of overdraft protection but not the fee may benefit from linking their checking account to a separate savings account or line of credit. Many banks offer this type of overdraft protection at a lower cost than standard overdraft fees.

In the case of a linked account, your checking account is linked to a savings account or overdraft line of credit at the same bank. When transactions in your checking account exceed the balance, the bank uses funds from the linked account to cover the difference.

However, linking a savings account means you’ll need to ensure your backup account always has enough emergency funds. Customers who link to a line of credit not only repay the borrowed funds, but they also must pay interest and an overdraft fee (the interest and fee combined are typically less than a standard overdraft fee).

Set up account balance alerts

Checking your account balance regularly and keeping track of expenses and scheduled payments is the best way to ensure you don’t get stuck with overdraft fees. However, banks now make tracking your account much easier by providing account alerts when you need them. You can receive email alerts, text messages and push notifications to get balance updates from time to time. Some banks will let you know when your account balance dips below a certain figure so you can quickly top up the balance as needed. It’s usually easy to set up alerts on your mobile banking app.

In addition to the steps above, account holders can actively seek out banks or accounts with favorable overdraft policies. Some banks may offer a grace period for overdrafts and others may not charge fees if an account is overdrawn by $50 or less.

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