What Is an Overdraft Fee?

Have you spent more money than you actually have in your bank account? It isn’t ideal and can happen to anyone. Yet when it happens, it may also trigger an overdraft fee, an additional charge that will lower your bank balance even further.

How do overdraft fees work? Learn more about this charge to avoid receiving one in the future.

What Are Overdraft Fees?

An overdraft fee is a specific type of bank fee charged when a purchase or withdrawal causes a negative balance in your bank account.

If you don't have enough funds in your account to cover the expense and the bank allows the charge to go through anyway, you’ll likely owe both the negative account balance and an overdraft fee.

Overdraft fees may add up with each purchase, putting you further in the red. For example, if you have $10 in your bank but buy a $20 meal, you’ll owe an overdraft fee for that meal purchase. Purchase gas for your car, and you may incur an additional overdraft fee for the fuel purchase. Although some banks limit the number of overdraft fees that a customer can incur in one day, including PNC, not paying attention to your bank balance and making multiple purchases may result in multiple fees.

Overdraft fees vary by bank. The Federal Deposit Insurance Corporation (FDIC) states that a fee of around $35 is to be expected^[1], but banks can choose to set their own amounts or even waive the fee entirely. To know exactly what you’ll owe, consult your bank’s account agreement or ask a representative.

Why Banks Charge Overdraft Fees

When a bank covers a transaction that exceeds the available account balance, the bank temporarily covers the difference until the account holder deposits additional funds. Overdraft fees help cover the cost of handling these transactions and encourage account holders to monitor their balances more closely.

Overdraft Vs. NSF Fees: Clarifying The Difference

An overdraft fee is a fee for allowing a payment to go through when there is not enough money in the account to cover the purchase. However, a non-sufficient fund (NSF) fee is charged when the bank decides to return a payment request.

An example of an NSF fee is when you set up a payment for a student loan to come directly out of a bank account. Yet, when the time comes for the payment to be made, there isn’t enough money to cover it. The bank would decline the transaction, sending it back to the student loan processor and charging you an NSF fee.

It’s important to note that this can prove costly. In addition to the NSF charged by the bank, the student loan company may also charge a “returned payment” fee, which means two fees for the same charge. In addition, because the bill has yet to be paid, either late fees or other consequences may result.

Overdraft Services

Many banks offer their own version of a protection program that may help you handle overdrafts. Overdraft coverage is an account feature that allows a bank, at its discretion, to pay certain transactions when the available balance is not enough to cover them. Customers typically must choose whether to set up this service. If they do, and the bank pays the transaction and an overdraft fee may apply, depending on the account and the bank’s policies. If they do not set up overdraft services, the bank may decline those transactions instead.

Overdraft protection is a different service. This is a safety net that the customer sets up by connecting another eligible account, such as a savings account or secondary checking account, to the protected checking account. If there is not enough available balance to cover a transaction, available funds may be transferred from the connected account. Banks may also charge a fee for this service.

Learn more about the overdraft solutions available at PNC.

Strategies for Avoiding Overdraft Fees

Overdraft fees aren’t inevitable. It’s possible to reduce them or get rid of them altogether. Some helpful tips for avoiding these fees include:

Monitor Your Account Balance

With many bank services available online or through mobile apps, checking a current balance is easier than ever. Some banks even let you set aside a certain amount to create a new “projected balance,” preventing you from spending money you’ve already authorized to come out of your account at a future date.

Set Up Account Alerts

You can take that monitoring one step further by creating account alerts. These can be for situations such as when making an unusually large purchase (such as $500 or above) or when an account balance drops below $200. By having a heads-up when your account balance is low, it’s possible to take action and keep your account in good shape.

Explore how PNC’s Low Cash Mode^® can help you avoid overdraft fees.

Connect A Savings Account

Another way to help avoid overdrafts is to connect a separate savings or checking account for overdraft protection. If the available balance in the protected checking account is too low to cover a transaction, funds may be transferred from the connected account, if available. This may help reduce the risk of declined transactions or overdraft fees, although some banks may charge a fee for the transfer.

Create A Budget

Overdrafts can often occur when you lose track of spending. However, with a budget, it’s possible to experience fewer surprises with your checking account balance. Know how much you’ll make for the month and your most common expenses, then plan other purchases around them. With a better idea of what’s available to spend, you may be less likely to make purchases that push your balance below $0.

Keep A Cushion

While it's best to be honest about your financial situation, some consumers find it helpful to adjust their account balances to be lower than they actually are. One example is putting an imaginary $250 transaction into a budgeting app to bring your "virtual" account balance down, despite that money actually being present in the account. Being creative in this way, you can trick yourself into not depleting the account. This provides a cushion if you make a mathematical error or forget about a recurring bill that is scheduled to be paid.

Choose an Account Without Overdraft Fees

If you're concerned about unexpected charges pushing your balance below zero, look for a checking account that does not charge overdraft fees and declines the transaction instead. This is common in entry-level accounts, such as PNC Simple Checking, which doesn't charge overdraft fees or require a minimum deposit when opened online.

Overdrafts From Unauthorized Activity

Overdrafts may occur not just from your activities but also from instances of fraud or unauthorized charges. If your overdraft fee is due to criminal activity on your account, act immediately and notify the bank. The bank will typically work with you to protect your account and reverse fees caused by hackers or identity thieves. Just be quick and share what you know.

Final Thoughts

In an ideal world, you’ll always have more than enough money to do everything you want, making overdraft fees a relic of the past. However, with many subscriptions, bills, and other payments processed each day, even the most organized consumers may face overdraft fees.

Fortunately, banks are often ready to work with you on a plan for how to avoid them. Or you could choose an account such as PNC Simple Checking that doesn't charge them in the first place.

Whether you set up overdraft coverage or not, set up overdraft protection or not, understanding what a bank charges and the solutions available will make you better informed. Monitoring your financial transactions regularly is also key to avoiding financial surprises.

Frequently Asked Questions

Can overdraft fees be refunded?

In some cases, a bank may refund an overdraft fee. Policies vary by bank, so it may help to contact customer service and discuss possibilities for fee reversals.

What happens if I don't pay an overdraft fee?

Unpaid balances may be sent to a collection agency, which may make it harder to open another bank account in the future.