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What Is an Overdraft Fee?

Overdraft Fees

Want to know one of the quickest (and most annoying) ways to lose money? If you guessed bank fees, you got it! And some of the worst bank fees you’ll pay are overdraft fees. Paying overdraft fees is like having your bank dip straight into your wallet, pull out a wad of cash and laugh all the way to the, well, bank.

But overdraft fees are also some of the easiest fees to avoid. When you build a budget and start telling your money where to go each month, you’re in great shape to never pay another overdraft fee. So, to help get you there, let’s take a look at everything you need to know about overdraft fees and what you can do to kiss those suckers goodbye for good.

How Overdraft Fees Work

An overdraft happens when you spend money you don’t have in your checking account and your balance falls below zero. When that happens, your bank or credit union will charge you an overdraft fee.

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See, your checking account is basically a digital wallet. It’s where your money lives so you don’t have to carry it around with you. Instead, you can use a debit card, which acts like cash, to pay for the things you buy. The money comes out of your checking account which makes things super simple and safe.

But here’s what you have to look out for with a checking account, and a debit card in particular. With cash, you can look in your wallet and see exactly how much money you have. And when it’s gone, it’s gone. With your debit card, if you’re not keeping track, it is actually possible to spend money you don’t have.

Let’s say John has $100 in his checking account. He spends $75 at the grocery store. A few days go by and he forgets to either jot down the transaction in his checkbook or to update his budget tracker. He heads to the pharmacy to pick up a $30 prescription. Thinking he still has $100 in his checking account, he swipes his debit card at checkout and leaves. The next day when he logs into his online banking, he notices his account is -$35. Not only did John spend $5 more than he had available in his account, but his bank also hit him with a $30 overdraft fee.

Sound familiar? If you know the pain and frustration of overdrawing your account, you’re not alone. Last year, big banks collected more than $11.5 billion in overdraft fees.1 And when you factor in smaller banks and credit unions that number balloons to over $34 billion.2 Now that’s what you call a racket.

If you’re already living close to the financial edge, then it really stings when those overdraft fees pop up. But this is just one of the many crummy ways banks make their money—by serving up fees to the people least likely to be able to afford them. That’s right, just 9% of account holders are on the hook for nearly 84% of overdraft fees.3 Nothing like adding insult to injury, huh?

What Overdraft Fees Cost

Overdraft fees (or you might see them called “insufficient funds” or “nonsufficient funds”) vary from bank to bank. Most range from $20–40 though. And here’s the kicker, depending on where you bank, you could potentially be charged a fee every day that your account maintains a balance less than zero. Or, if you make several transactions in a day that overdraw your account, you could be charged a fee for each individual transaction.

Here’s something extra sneaky banks do to make money off you. Let’s say you use your card five times in one day, but it’s only the last transaction that makes you overdraw your account. Well, your bank can change the order and process the largest transaction first so that more of the smaller transactions send you into the negative. Then they can charge an overdraft fee for each of those charges instead of just the final one.

So, when you’re choosing a bank, whether it’s a traditional bank or credit union or a completely online bank, find out what their overdraft fee policies are before you open your account. Even on the low end, those fees can really add up. And every overdraft fee is money you don’t get to throw at your debt snowball, save for Christmas, or pile into your emergency fund.

Overdraft Protections

Most banks offer different forms of overdraft protection, or ways to “help” you if you overdraw your bank account. Now before you go thinking your bank is some kind of do-gooder, let’s break down how these “protections” work.

If you overdraw your bank account and you have overdraft protection in place, your bank may automatically move money from your savings account (or some other linked account) to your checking account to cover the difference. But a lot of banks will charge you a fee for this “service.” Or, if you’re still using credit cards, your bank might cover your overdraft by charging it to a linked credit card. Either way, you can bet your bank isn’t really trying to protect you.

How to Avoid Overdraft Fees

If you’re looking for how to avoid overdraft fees, the simplest answer is to not spend more than you have. But simple doesn’t always mean easy. If you’re new to zero-based budgeting (telling every dollar where to go before the month begins), struggle with overspending, or are just starting to get your feet wet with all this money stuff, then it’s easy to get turned around. So, if you don’t want to spend another dime on overdraft fees, the first thing you need to do is get on a budget.

Never Pay Another Overdraft Fee

You might be asking yourself, “Why don’t banks just make it so you can’t use your debit card if you don’t have the money?” Here’s a dirty little secret: Overdraft fees are a way for banks to make a ton of money off people’s low bank balances and mistakes.

Rather than disabling your account so you can’t overspend, most banks have no problem letting you buy more than you can afford and then walloping you with fees after the fact. It’s gross. And you deserve better, especially if you’re doing the hard work of trying to take control of your money.

You don’t have to fall into the big bank trap anymore. That’s why we’re building Gazelle, a new banking experience from Ramsey Solutions! We’re ready to help you outrun the normal, debt-driven banking experience so you can win with your money, not lose it in stupid bank fees. (That means no overdraft fees. If you don’t have the money, guess what? Your debit card won’t work!) If you’d like to become one of the first beta users, sign up today!