What is an overdraft fee and how can you avoid it?

An overdraft fee can be triggered when a transaction, withdrawal or transfer causes your account balance to go negative. It can also be charged if your account is already negative when a transaction is debited.

Although some banks don’t actually charge them, overdraft fees can be costly.

What is an overdraft fee?

An overdraft fee is what a bank charges you when you withdraw more money from your account than the amount you have in it.

When someone’s account is overdrawn, the bank may lend money to cover the total expense. The customer is responsible for paying back that amount, as well as an overdraft fee, which can sometimes be even more than the overdrawn amount.

Overdraft fees can be a significant and unnecessary expense, particularly if you have to pay them often. However, there are easy actions you can take to avoid them and ways you can negotiate to get them waived.

In recent years, various banks have lowered or eliminated overdraft fees in response to heightened pressure from federal regulators and consumer advocates. The average overdraft fee is $27.08, according to Bankrate’s most recent checking account and ATM fee study.

Overdraft fee: an example

If your bank covers overdrafts, it may allow a withdrawal or debit to take place even if you didn’t have enough funds in the account. It may charge you a resulting overdraft fee. Your balance will dip below zero, and you’ll have a negative balance representing the amount you now owe the bank.

Suppose, for example, you have $50 in your account, but you need $75 to pay for an immediate expense, such as a car repair. You’re $25 short, but the bank loans you that $25 and the payment clears. Now, let’s say the bank charges a $30 overdraft fee. That $30 fee, plus the $25 overdraft, would leave you with an account balance of -$55.

How much an overdraft fee costs

Overdraft fees are now on the rise, averaging $27.08, according to Bankrate’s 2024 checking account and ATM fee study. This is up from $26.61 in 2023, and it comes after two consecutive years of declines. That can add up to a significant amount if you frequently overdraft your account

Those who are more financially disadvantaged are more vulnerable to incurring overdraft fees. According to a 2023 report from the Consumer Financial Protection Bureau (CFPB), 34 percent of households earning less than $65,000 were charged an overdraft or nonsufficient funds (NSF) fee in the previous year, compared with just 10 percent of households earning over $175,000.

The exact fee charged for an overdraft varies per bank, but here are the fees of some popular financial institutions:

How to avoid overdraft fees

Despite their inconvenience, overdraft fees are often avoidable when you take some basic precautions.

1. Opt out of automatic overdrafts

While overdrafts can help you avoid embarrassing situations at the cash register, you don’t have to accept the service. When you open a new account, part of the paperwork you fill out asks whether you want to take advantage of this service.

If you opt out of overdraft coverage, your bank won’t cover you if you overdraw your account and will return any payments that you can’t make unpaid — but you won’t be charged the overdraft fee.

2. Use an account that doesn’t charge you

Capital One, Ally Bank and Alliant Credit Union are just a few of the financial institutions that stopped charging overdraft fees on their accounts. You can always consider switching to a new bank that doesn’t charge overdraft fees (or has cut them) to save more money in the long run. Online banks typically don’t charge overdraft or NSF fees.

3. Sign up for bank alerts

A simple way to help yourself avoid unexpected overdrafts and save fees is to set up a bank account alert to notify you when your account balance falls below a certain amount.

For example, you could set up automatic notifications any time your account balance drops to $250; then you’ll know to be careful with spending no more than that balance until you’ve deposited additional money into the account.

4. Overdraft protection

It may sound similar to automatic overdrafts, but overdraft protection is different in that your bank covers any overdraft on your behalf by automatically loaning you the money and making the payment. With overdraft protection, the bank will transfer money from another linked account to cover an overdrawn amount.

Note that the linked account generally has to be with the same institution. Some banks, however, will still charge a fee for using overdraft protection.

5. Keep a cushion balance

Try keeping a little extra money in your account to cover those forgotten or unexpected charges.

“One mistake consumers often make in this area is forgetting about recurring transactions like subscriptions or automatic monthly payments,” says debt expert Jackie Beck. “One way to avoid overdraft fees is to make sure you keep a cushion in your checking account above and beyond what you normally spend each month.”

How to get banks to waive an overdraft fee

If you are charged an overdraft fee, that doesn’t always mean you’re stuck paying it. It doesn’t hurt to negotiate to try to have the fee reimbursed. Here are a couple of steps you can try.

Call the bank

There’s no guarantee it’ll work, but you can always call the bank and politely ask to have the charge removed from your account. “If it’s your first offense, your bank will often work with you,” says Chris Abrams, founder of Abrams Insurance Solutions.

Your odds of success will go up if you infrequently overdraw your account, remain polite and are a good bank customer. Don’t expect an easy yes, though. Be prepared to explain why the bank should waive the fee for you.

Try an app

You can also use an app that will notify you of bank fees you’ve been charged. An example is the Cushion app, which has a “Bank Fees” section that lists late fees, ATM fees and overdraft fees you’ve been assessed. You can choose to contact the bank directly to negotiate for a reversal.

Bottom line

Overdraft fees can occur when a transaction gives you a negative balance. It’s possible to avoid these fees at certain banks, whether you simply opt out of automatic overdrafts, use an account that doesn’t charge you an overdraft fee, or sign up for overdraft alerts. It also helps to keep an extra amount of cash in your account to cushion you from an unexpected expense that could trigger an overdraft.

— Bankrate’s Karen Bennett, Matthew Goldberg and René Bennett contributed to updates of this story.