An overdraft occurs when you overdraw your checking account, which simply means that you have spent more on a purchase, payment or withdrawal than you have in available funds in that account.
What is an overdraft fee?
An overdraft fee is what your bank charges you when you make a payment or purchase against your checking account that exceeds your available funds. The bank covers the dollar amount of the shortage so that your transaction can be completed, but then it requires you to pay a fee for that service. You must pay this overdraft fee in addition to repaying the amount the bank advanced to cover your purchase or other overpayment.
Overdraft fees may be issued per transaction — in other words, each time you spend more than your available account balance. For example, if you make a debit purchase at the grocery store that overdraws your account, and then you make an online rent payment before you have replenished your funds, you may be charged two overdraft fees.
Is an overdraft fee the same as an insufficient funds (NSF) fee?
No. An overdraft fee is assessed when an item is paid, while an NSF fee is assessed if an item is returned without payment.
While an NSF fee is about the same amount as an overdraft fee, there can be more consequences associated with the NSF scenario. Since the person or business you were trying to pay does not receive the payment, they or their bank may charge you a returned-check or payment fee. Additionally, you may face late fees, service cancellations or even the involvement of a collection agency. If you don’t resolve this payment issue promptly, your late payment may be reported to the credit bureaus and negatively impact your credit.
What can be done to avoid overdraft fees?
Being proactive about protecting your account from overdrafts may help you avoid overdraft fees. Here are some precautions you can take:
Track your daily spending. Rather than waiting to think about your account balance until you are on the verge of making a purchase or payment, stay on top of it by tracking your daily spending through an app or other online banking tools. By regularly checking your account balance, viewing recent debits and monitoring scheduled payments, you can make informed decisions about how much you can spend before running the risk of overdrawing your account.
Keep sufficient funds in your account. Be sure you’re regularly depositing enough funds into your account to cover your upcoming expenses and purchases. If your employer offers direct deposit, consider enrolling so that you have a steady flow of funds into your account. Having a budget in place may help you anticipate how much you should keep in your account and how much you can afford to put into a savings account for emergencies and large expenses.
Consider overdraft protection. Your bank may offer you a service called overdraft protection, which enables you to link your primary checking account to a secondary account typically either a savings or additional checking account. Available funds can be automatically transferred from that account to help prevent potential overdrafts. There may be a fee associated with transferring funds between accounts, but these are typically lower than standard overdraft fees. Some banks may also allow you to link your checking account to a credit card or line of credit. Be aware that any transfers from credit accounts may be considered cash advances, which may be subject to fees and potentially higher interest rates than regular credit purchases.
Sign up for text or email alerts from your bank. Many banks enable customers to sign up for text or email alerts that let you know when the funds in your primary checking account drop below a set amount. These warnings give you the chance to replenish your account before you overdraw. Check with your bank to see whether this service is available to you.
Consider NOT opting in to overdraft coverage. Overdraft coverage may not be right for everyone. Just keep in mind that if you don’t opt in to this service, you may have to deal with a declined debit card transaction for an everyday one time debit card purchase or ATM withdrawal if you don’t have sufficient funds.