Your bank can’t charge you a fee for overdraft purchases unless you consented.
You can choose to have your bank cover the balances of any purchases you can’t afford — but it’ll 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When money is withdrawn from a bank account and the account balance dips below zero, this is known as an overdraft.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 in your account and you spend $20 on a debit card purchase, your account would be overdrawn by $15.
Your bank can’t legally charge you a fee for point-of-sale purchase or ATM withdrawal overdrafts unless you opted in to overdraft coverage, but they can charge you for checks and automatic bill payments either way.
Fees from the major banks are:
What is overdraft protection?
Overdraft protection guarantees that if you make a purchase your account balance can’t cover, the transaction will clear. You have two options for overdraft protection:
- Overdraft transfer. If you have a linked savings account at the same bank, you can have your bank automatically transfer funds from your savings account to your checking account to cover the overdraft. Some banks will place a limit on how many times you can do this per month or will charge a small fee.
- Overdraft coverage. You can have you bank cover the cost of the purchase and charge you any subsequent overdraft fees.
What if I don’t set up overdraft protection?
Your bank will decline your debit card if you attempt to make a purchase that costs more than the balance of your account.
Tips for avoiding overdrafts
To keep your finances healthy:
- 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 or using an app like Cleo to keep an eye on your balance.
- Use ATMs with caution. Certain machines will let you withdraw money you don’t have, 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.
- Take stock of your spending habits. If you’ve had to deal with several overdrafts, it might be time to sit down and write up a new budget — and practice sticking to it.
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 to overdraft at some point, compare checking accounts and use a bank that offers low fees.
Frequently asked questions