No one likes paying bank fees, but some hurt worse than others. That’s especially true of overdraft fees, which are some of the highest charges you can incur.
Considering that the average overdraft fee now tops $26, overdrawing your balance can get expensive. Even so, some banks are more forgiving and might even waive overdraft fees completely.
Here’s a look at how overdraft fees work and how you can avoid them.
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What Is an Overdraft?
Unlike with a credit card, which lets you spend on credit and pay it back later, you have to limit your spending from a checking account to the balance you have available. If you make a withdrawal or debit card purchase for more than what’s in your account, you could overdraft.
“An overdraft occurs when a debit (such as checks or bill payments) is made from your checking account without having a sufficient available balance,” says Brian Milton, senior vice president of banking at Thrivent. Usually, the bank covers the difference, allowing the transaction to go through, but you are charged a fee and expected to pay back the negative balance right away.
[Read: Best Checking Accounts.]
How Banks Handle Overdrafts
“Banks have discretion in determining whether to allow a debit to be processed when there is an insufficient balance in the checking account,” Milton says. Depending on the bank, overdrafts can be handled in a number of ways:
— Allow the overdraft to occur. In this case, the transaction will go through, and you will have a negative account balance. You will also be charged an overdraft fee and may be charged additional fees every time a transaction occurs before the balance becomes positive. You may also be charged a fee if your account remains negative for a certain number of days. However, you must first give your bank permission to charge you these fees when they apply to ATM or debit card overdrafts.
— Decline the transaction. If you don’t give your bank permission to allow debit card overdrafts — called “opting out” — when you perform a transaction that would put your account balance in the red, the bank declines it so that it doesn’t actually go through. You aren’t charged a fee when this happens. You can always opt out, even if you previously opted in to overdrafts.
— Provide overdraft protection. Some banks allow customers to sign up for overdraft protection. When an overdraft occurs, you can use your funds from another account to cover it rather than allow the balance to become negative and incur a fee.
What Is Overdraft Protection?
Overdraft protection is a service that many financial institutions offer, which allows you to withdraw money from your account even if the funds are not available to cover that withdrawal, says Valerie Moses, former senior relationship manager at Addition Financial Credit Union.
Usually, you need to link another account you have at the same institution, such as a savings account, money market account, credit card or line of credit. When you overdraft, funds are automatically transferred from the overdraft protection account to your checking account to cover the balance. “Financial institutions typically charge a fee for this service,” Moses says.
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How Do You Guard Against Overdrafts?
The best way to guard against overdrafts, Moses says, is to be aware of what is in your account at all times. “With online and mobile banking tools available, it is easier than ever to keep track of your account activity and know how much you’re spending,” she says. It’s helpful to sign up for email or text alerts through your bank that will let you know when your balance falls below a certain threshold.
Even so, Milton says it’s important to record all account transactions, including card purchases and automatic payments; consider deposit holds; and review account statements each month.
Moses says that you should especially keep an eye out for pending charges that might hit your account in a day or two, before making a purchase. Examples include debit transactions that were run as credit or a check that hasn’t been cashed by the recipient yet.
The Best Banks for Avoiding Overdraft Fees
Though it takes a bit of diligence on your part to prevent overdrafts and the associated fees, it also helps to bank with a financial institution that doesn’t charge these fees or that offers tools to avoid them. It’s always a good idea to check with your local bank or credit union to find out what options it has available.
Below are a few examples of the best banks for avoiding overdraft fees.
Chime Bank
Chime is an online bank that promises no hidden fees. It also waives fees for debit card overdrafts of up to $200. This benefit, known as SpotMe, is available to customers with monthly direct deposits that total at least $200. Transactions that would result in an overdraft of more than $200 are simply declined.
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Discover
The Discover Cashback Debit account offers two options to avoid overdraft fees. Overdraft protection allows you to connect a qualifying Discover savings or money market account that can be used to cover overdrafts on checks, online bill payments and ACH transfers at another bank. Balance+ overdraft protection covers up to $200 in overdrafts on debit card transactions if you have at least $200 in direct deposit set up. The account also allows you to earn 1% cashback on up to $3,000 in debit purchases each month.
Capital One
If you have extra savings set aside in a Capital One 360 Performance Savings account, the bank’s 360 online checking account can make a good pairing. If you overdraft, you can have funds automatically transferred to your checking account to cover the difference at no cost. Other options for avoiding overdraft fees include using Captial One’s “No-Fee Overdraft” or opting to have transactions declined.
Truist
The Truist One Checking account offers overdraft protection and a $100 negative balance buffer. The overdraft protection is an optional service that uses a qualifying Truist deposit account, credit card or line of credit to cover overdraft charges. Customers can instantly qualify for the $100 negative balance buffer by setting up at least $100 in direct deposits for two months and keeping the account balance positive.
Chase
The Chase Secure Checking account is a viable option for those looking for a no-frills account. Aimed at customers who may have had a negative banking history in the past, such as repeated overdrafts, the account will not charge overdraft fees and instead will decline or return charges that are more than the available balance. Chase does charge a $4.95 monthly fee for this account, but custombers can avoid the fee by setting up at least $250 of direct deposits each month.
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The 5 Best Accounts for Avoiding Overdraft Fees originally appeared on usnews.com
Update 09/13/24: This story was previously published at an earlier date and has been updated with new information.
