Understanding Overdraft Fees

Introduction

Imagine buying a $5 snack and later finding out it cost you $40. That can happen if your bank account goes below zero and you get hit with an overdraft fee. Understanding how overdrafts work can save you a lot of money.

What Is an Overdraft?

An overdraft happens when you spend more money than you have in your checking account. If your bank has overdraft coverage, it may approve the purchase anyway and charge you a fee. Overdraft fees have historically averaged around $35 per transaction, so several small purchases can quickly turn into a big bill.

How Banks Handle Overdrafts

Some banks decline transactions when you do not have enough money. Others allow them and charge a fee. Some offer overdraft protection, which links your checking account to a savings account and transfers money when needed, often for a smaller fee or no fee. In recent years, many large banks have reduced or eliminated overdraft fees due to public pressure.

How to Avoid Them

The easiest way to avoid overdrafts is to keep track of your balance. Turn on low-balance alerts in your banking app and check your account before making purchases. You can also opt out of overdraft coverage, so transactions are simply declined instead of costing you a fee. Keeping a small cushion of extra money in your account helps too.

Conclusion

Overdraft fees are one of the easiest money mistakes to avoid. With a few simple habits, you can make sure every dollar you earn goes toward things you actually want!