Editor's Note: This story originally appeared on The Penny Hoarder.
Banks and credit unions are businesses, and as businesses, they have to make money to succeed. But their method of getting that money through exorbitant overdraft fees is starting to go away.
In the middle of 2021, online banking giant Ally eliminated its overdraft fees completely, and then Alliant Credit Union followed Ally’s lead. By the end of the year, Capital One became the first top 10 U.S. bank to dump overdraft fees.
Then, barely a week into 2022, Bank of America and Wells Fargo announced changes to their overdraft fee policies. BofA, the nation’s No. 2 bank, is cutting its penalty from $35 to $10 and will no longer charge for bounced checks. That change is effective as of May 2022.
By the third quarter of 2022, Wells Fargo — No. 3 of the nation’s Big Four banks — said it will give customers 24 hours to make good on overdrafts and negative balance accounts before enforcing such fees. It is eliminating its $35 penalty for returned items because of non-sufficient funds but has not budged on the $35 overdraft fee penalty.
So the best way to avoid overdraft fees? Bank at a financial institution that doesn’t charge them and expect that list to grow in 2022.
What Are Overdraft Fees?
Overdraft fees happen when you try to spend more money than you actually have available in your account balances, be that checking or saving. Such fees can be charged when you write a check that would otherwise bounce, swipe your debit card when you have insufficient funds to cover the purchase or even withdraw more cash than you have available from an ATM.
Overdraft fees only occur if you have opted into overdraft protection. On the surface, overdraft protection may sound useful. Instead of having embarrassing conversations when your card is declined or running the risk of expensive bounced check fees, overdraft protection allows you to continue making purchases even when you don’t have enough money to cover the transaction.
So what’s the problem?
Overdraft Fees Are Expensive …
In 2021, the average cost of an overdraft fee was $33.58, according to Bankrate’s annual survey on checking account fees. In addition, many financial institutions charge $2 to $5 per day until your account has money again.
Some banks also allow you to overdraw multiple times a day, meaning you could be hit with multiple fees in a single day before you even realize you’re overdrawn. Or they don’t stop you when your ATM withdrawal exceeds your account balance.
Here’s an example of how these fees can add up:
Let’s say your checking account has $50 in it, but you swipe your debit card for a pair of sneakers that cost you $100. With overdraft protection, you get to go home with your new pair of kicks, perhaps none the wiser that you have overdrawn your account.
Because your bank covered the difference between the cost of the shoes and what you had in available funds, your checking account is now in the negative. But it’s not just -$50; it’s -$85 because your bank charged you a $35 overdraft fee in addition to the $50 it loaned you.
That $100 pair of sneakers winds up costing you $135, plus any daily fees until you’ve deposited funds into your account to cover the purchase and pay off the overdraft fee.
All of these overdraft fees helped U.S. banks earn $6.18 billion in the first nine months of 2021, according to S&P Global Market Intelligence.
… But the Cost of Not Banking Is Even More Expensive
Research shows that low-income families, especially those in the Black and Latinx communities, are more likely to face higher and more frequent overdraft fees. Those overdraft fees, as well as other disproportionate fees, are among the top reasons such Americans decide to go without a bank account, according to Money.
During the pandemic, the banking industry has come under fire from the Consumer Financial Protection Bureau (CFPB) and other regulators for the vast amounts of money it has made from penalty fees, especially from people who had lost jobs.
However, not having a bank account can be even more expensive than facing multiple overdraft fees. For example, those who go without a bank account often use debit cards and money orders to pay for groceries, bills and rent, but these all carry fees, some ranging from $1 to $5 per transaction.
In fact, unbanked consumers spend more than double what those with bank accounts spend on access to their money each year (via check cashing, money orders, prepaid debit cards, etc.).
How to Avoid Overdraft Fees
To recap: Overdraft fees are costly, and they can spiral in a way that makes it harder and harder to climb out of a negative balance.
So what can you do to avoid these expensive and unnecessary fees?
1. Opt Out of Overdraft Protection
Contact your bank or credit union if you’re unsure whether you’re signed up for overdraft protection. If you are, ask to opt out. If you opt out of overdraft protection, however, be prepared for your card to be declined if you attempt to spend more than you have available.
Some banks will still charge non-sufficient funds fees (NSF fees) when you attempt to swipe your debit card for more than you have available or write a bad check that is returned. Check with your bank to determine its specific fee structure.
2. Monitor Your Account Regularly
Gone are the days of balancing checkbooks after every check or debit card purchase. While some consumers still go through the process of balancing their checkbooks, more are increasingly allowing their mobile apps to do the work for them. This means you always have an up-to-date available balance right at your fingertips.
Before making any purchase — online or in-person — pull out your phone and verify your account balance.
3. Set Up Your Account With Low-Balance Alerts
Log in to your online or mobile banking platform and update your settings so your bank notifies you if your account balance dips below a certain threshold. Then, refrain from making any card transactions until you have deposited funds into your account and your bank has processed them.
You’ll still need to check your account balance regularly, even with these alerts set up. If you set up an alert for funds below $100, have $150 in the account and spend $200, you’ll have spent more than you have available without having ever received a low-balance alert.
4. Set Up Automatic Payments — but Don’t Forget About Them
When you set up automatic payments for recurring bills, you can control the exact date that money is withdrawn from your account. Add reminders to your calendar so that you always know when money is being taken from your checking account. This is an area where many folks have gotten tagged for overdraft fees because they weren’t alerted that their account had fallen into the negative balance.
5. Opt In to Direct Deposit for Your Paycheck
An easy way to ensure your checking account balance stays high enough to cover your expenses is to set up direct deposit for your paycheck, rather than waiting for delivery of a paper check and then driving to your bank to deposit it (or depositing it via mobile deposit and waiting for the funds to clear).
6. Keep a Cushion in Your Checking Account
Though you’re more likely to earn higher interest on money kept in a savings or money market account, it could be to your advantage to keep a chunk of change in your checking account to cover unexpected expenses.
However, since frequent overdrafters have around $300 in their accounts, this advice is likely only to apply to infrequent overdrafters who overdraw out of carelessness, not those struggling to pay bills each month.
7. Consider Overdraft Protection Tied to Another Account
Some banks will allow you to opt in for overdraft protection that covers your purchases by pulling funds from a linked account, like a savings account at the same institution or a checking account with another institution.
Doing so may save you the fee that the bank charges for spotting you the cash when you overdraw, but there may be a separate annual fee for this service, plus a small fee each time you must use it.
8. Don’t Pay With Debit Cards for Gas, Hotels or Car Rentals
Such merchants typically place a hold on your card for a couple of days; gas stations sometimes charge upward of $50 while fancier hotels can place significantly more sizable blocks on your card for incidentals. Such a hold could be enough to overdraw you.
Instead, pay cash, use a prepaid debit card or swipe a credit card — but only if you intend to pay it off in full each month.
9. Search for a Bank That Doesn’t Charge an Overdraft Fee
The advent of online banking has brought increased competition to the market. Newer online-only entrants especially are offering no-fee accounts to attract new customers. Do your homework on accounts that have no fees and pay out higher interest, and take the time to switch.
What to Do If You Overdraw Your Account
Even if you take precautions, you may still overdraw. Act fast, and you may be able to have the overdraft fee waived — or at least avoid additional fees.
The following is what you should do if you overdraw your account:
1. Deposit Money in the Account Immediately
The fastest way to clear funds is transferring money from a linked savings account, which makes the money available immediately. You can also visit your bank in person to deposit cash.
Getting money in the account right away will help you avoid additional daily fees for being in the negative. It can also help you prevent additional overdraft fees if you have auto payments scheduled or checks on the verge of being deposited.
2. Contact Customer Service
If this is your first time overdrafting (or the first time in a long time), your bank may waive the fee if you speak to customer service. Remember to be polite, as the representative you speak to will likely be the one who can ultimately waive the fee.
If the representative cannot help you, you can always ask to speak to a supervisor or call back and try your luck with a different agent. You can also visit a local branch of your bank to speak to someone in person.
Banks and Credit Unions That Don’t Charge Overdraft Fees
These eight financial institutions — banks, credit unions and cash management services — do not levy overdraft fees:
- Alliant Credit Union
- Capital One
- Betterment *
*Fidelity’s account is a cash management account, which is slightly different from a traditional checking account and is built for those using Fidelity to invest. Betterment is also a cash management service that offers investing programs and a mobile-first checking account.
**KeyBank’s overdraft protection for its Hassle-Free Account results in a declined transaction. No fees, but also declined payments for things like rent and utilities can still result in late fees for those struggling with finances.