Overdraft Fees Explained (and How to Never Pay One Again)

An overdraft fee is when you spend more than is in your checking account and the bank covers the transaction, then charges you - typically $35 - for the privilege. It is one of the most regressive fees in American banking. The people who pay it most are the people who can least afford to.

How the fee works

You have $4 in your account. You buy a $5 coffee. The bank lets the transaction go through, leaving you at -$1. They then charge a $35 overdraft fee. Your balance is now -$36 because of a coffee.

Worse, if you have several small charges pending, many banks reorder them largest-to-smallest, so they can trigger multiple overdraft fees from a single overdraw. The CFPB has pushed back on this practice but it is not gone everywhere.

You can opt out

For one-time debit card and ATM transactions, federal rules require banks to ask whether you want overdraft "coverage." If you opt out, your debit card simply gets declined when you do not have the money. No fee. Embarrassing in the moment, free in the wallet.

For checks, automatic bill pays, and other transactions, the rules are different. Banks can still bounce a check (returned-item fee) or charge an overdraft, depending on the account.

Better options if you have ever overdrawn

• Move to a bank that does not charge overdraft fees. Several major online banks have eliminated them entirely. So have a growing number of credit unions.
• Set a low-balance alert. Most apps let you get a notification when your balance drops under, say, $50. It is free and surprisingly effective.
• Build a small buffer. A standing $100 you treat as "untouchable" in checking prevents most overdrafts. The savings account in the two-account setup handles the bigger version of this.

Bottom line

Overdraft fees are not bad luck. They are a product the bank sells you, often without asking, at a 700% markup over the actual cost to them. Opt out. Use a bank that has eliminated them. Move on with your life.

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