What Is An Overdraft Fee And How Do You Avoid It?

Overdraft Fee Definition

Overdraft fees are fees charged by your bank when you have too low a balance to cover a payment you’ve made.

To avoid the transaction being cancelled, the bank provides what is called an ‘overdraft protection service’ in which they cover the balance difference for you, but also charge a fee for doing so.

Overdraft fees are generally around $30, although this will vary based on your individual bank.

For someone who is frequently over-drafting on their account, that can add up to hundreds of extra dollars per year.

Subscribe to the Finance Strategists YouTube Channel ↗

How to Avoid Overdraft Fees

How can I avoid overdraft fees?

As a part of Federal Law, the government requires financial institutions to obtain your permission before adding overdraft protection to your account.

This allows the bank to apply a fee if you accidentally remove too much cash from your account.

While the goal is to not overdraft your account at all, this protection service is useful and can save you some potential embarrassment by preventing your debit or credit card from getting declined!

  • Sign up for online banking – online banking allows a person to track their spending and account balances much easier and on the go, making it much less likely for you to overdraw your account
  • Set up balance alerts – most banks offer an option to send you an alert if your balance is running low. This can be a helpful reminder if you know you have upcoming payments to be made
  • Keep a cushion in your account – by keeping some extra money in your account to protect against unexpected expenses, you can help eliminate overdraft fees and save yourself more money in the long run

How Much Is an Overdraft Fee?

An overdraft fee is typically around $35 dollars, but it varies by banking institution.

According to the Consumer Financial Protection Bureau, overdraft fees cost Americans almost 17 billion dollars annually.

With a few easy steps you can make sure that you are easily preventing this unnecessary pocketbook expense.

Overdraft fees are fees charged by your bank when you have too low a balance to cover a payment you’ve made.
An overdraft fee is typically around $35 dollars, but it varies by banking institution.
The best way is to not spend more than you have in your account! After that, try these ideas: set up online banking (it's easier to keep track of account activity); set up balance alerts; build a cushion into your account.
According to the Consumer Financial Protection Bureau, overdraft fees cost Americans almost 17 billion dollars annually.
As a part of Federal Law, the government requires financial institutions to obtain your permission before adding overdraft protection to your account. Without it, withdrawals may be rejected if you try to spend money you don't have.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.