Let’s face it: few things are more frustrating than looking at your bank statement and seeing a negative balance and an overdraft fee! Bank policies on over drafting vary, with some banks charging additional fees that can take a significant toll on your personal finances (not to mention self-esteem). That’s why we’re explaining the different types of fees, how they work, and, most importantly, how to avoid them.


What is An Overdraft Fee?

Quite simply, an overdraft fee is a bank charge when you spend more money than you have available in your bank account. These fees aren’t regulated, meaning the amount can vary depending on which bank you use, but typically it’s about $35 a pop. Transactions that don’t require your consent, like subscriptions or automatic bill payments, can rack up these overdraft fees quickly when account balances are low.


How Do Overdraft Fees Work?

Each bank has its own guidelines when it comes to dealing with overdrafts, so it’s always smart to review your personal bank’s policies. Some banks show a little leniency and will let you get away with overdrafts as long as it’s less than $5. However, they often limit how many times you can overdraw before transactions are declined. Other banks have various penalties associated with overdrawing an account. Here, we break down the three most common types of fees.


Non-Sufficient Funds (NSF) Fee

Let’s talk about the nonsufficient funds (NSF) fee. This fee is charged whenever your bank declines to complete any transaction that will overdraft your account balance. For instance, if you write a check for more money than you have available without overdraft protection, the bank will decline the check but still charge you an NSF fee.

Overdraft Protection Fee

Most banks ask if you want to opt into overdraft protection, which transfers money from one of your accounts (typically a savings account) to another (like a checking account). Legally they can’t enroll you by default, so it’s an option you must select. This can be a great feature for online banks, which often offer overdraft protection completely free of charge. Some banks may charge for transferring funds between accounts automatically, but it’s typically less than the overdraft fee.


Extended Overdraft Fee

These fees are meant to penalize you for keeping an account overdrawn for an extended period of time, normally over 5 to 7 days. Failing to get your account back in good standing before this timer runs out can leave you in real trouble. Some banks may charge daily fees, driving you deeper and deeper into the red.


How to Avoid Overdraft Fees

With some smart shopping and a little savvy, you can find ways to lower your fees or avoid them entirely. Here are a few ways how this works.


Choose your bank wisely

Not all banks are created equal. Some of them don’t charge overdraft fees, while some have steep penalties. It’s important to select the account with the right features for you. Fortunately, the FDIC (the government organization that insures bank accounts) created an easy checklist to help you make wise decisions. You can find it here.


Track your balance and set up alerts

Back in the day, you had to go to the ATM or talk to a bank teller to know your balance. But with digital banking, checking your bank’s secure app is easy. Most banks will even let you set up alerts if your account balance drops below a set level. The easiest way to avoid overdraft fees is never overdraft, and the best way to do that is to always know how much money you have at your disposal.


Avoid overusing overdraft protection

Overdraft protection isn’t technically a way to avoid overdraft fees, but it is a good way to cut the costs associated with them. Paying $10 to $12.50 per protective transfer is still preferable to get hit with a $35 overdraft or NSF charge. Still, you need to be aware that if you overuse this protection feature, it might drain money from your savings account and leave you with two dry accounts as the fees rack up. 

In the end, common sense goes a long way when it comes to protecting your bank balance. A little vigilance and self-control can go a long way. And if you ever need simple budgeting tips or small hacks to save you money, The Exchange Blog experts here at Pangea always have you covered.