Learn about overdraft fees

Find out about the pros and cons of using overdraft protection.

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You can choose to have your bank cover the balances of any purchases you can’t afford — but it could come with hefty fees.

What is an overdraft?

When money is withdrawn from a bank account and the account balance dips below zero, this is known as an overdraft. It’s essentially a short-term loan from the bank to cover the cost of the purchase.

For example, if you had $5.00 in your account and you spend $20.00 on a debit card purchase, your account would be overdrawn by $15.00.

Types of overdraft fees

All overdraft fees are not created equal. Here’s how to sort them out:

Fee typeAverage costWhat it’s for
Overdraft$5.00 – can be charged per item, day, or month.When your bank covers the difference for insufficient funds.
Non-sufficient funds$50.00/itemWhen your bank declines a transaction or rejects a check due to insufficient funds it will charge (NSF)
Overdraft protection$5.00/month – though this may be included in your monthly account feesWhen your bank automatically transfers funds from a linked account to cover a transaction you’ve charged.

Tips for avoiding going into overdraft

The best way to avoid going into overdraft is to keep your finances healthy. To help keep your finances in good shape you should:

  • Check your balance. Overdraft fees can add up quickly, so stay up-to-date with your finances by checking your balance, setting up push notifications on your banking app when your balance falls below a certain threshold. You could also use an app like Mint to get notifications when your bills are due so you can make sure you have enough money in your account to cover them.
  • Use ATMs with caution. Certain machines will let you withdraw money you don’t have, potentially leading to hefty overdraft fees.
  • Be aware of pending balances. Account balances displayed on ATMs and online may not always be correct. Recent purchases can take time to show up, so factor in any recent pending purchases when deciding what you can spend.
  • Know how much you can handle. Steer away from spending too much by choosing the lowest possible overdraft protection limit.

Some tips if you’ve already gone into overdraft

Here are some tips to help you avoid fees and make the best use of your overdraft:

  • Figure out how much you need to pay back. Collate all the fees that apply to you and figure out if you need to pay off the loan on demand.
  • The faster you pay off your debt, the better position you’ll be in. Discover if there’s a time limit. You may have to pay your overdraft by a specified time so it’s wise to repay the amount you owe as fast as you can to lower the level of interest you might incur. Once you’ve paid back the money, it’s a good idea to cancel the overdraft so this doesn’t happen again.
  • Judge your spending habits. Do you spend more than you earn on a regular basis? If you’ve had to deal with several overdrafts, it might be time to sit down and write up a new budget. If you need a few pointers, check out our helpful guide on how to make a budget.

    Bottom line

    Keeping track of your finances and setting up overdraft protection with your bank can help protect you from hefty fees. But if your budget is tight and you’ll likely need overdraft at some point, compare chequing accounts and use a bank that offers low fees.

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