Overdraft fees: how they happen and how to avoid them

Three ways a short balance can cost you

When a payment arrives and your balance is too low, the bank does one of two things. It can pay the transaction, leaving you with a negative balance and usually charging an overdraft fee. Or it can decline or return it, which may bring a non-sufficient funds (NSF) fee from the bank and a returned-payment fee from whoever you were trying to pay, such as your landlord or phone company.

Fees vary by bank, and some banks have reduced or dropped overdraft and NSF fees in recent years, so check your own account's fee schedule rather than assuming.

Your opt-in choice

For one-time debit card purchases and ATM withdrawals, federal rules say a bank cannot charge you an overdraft fee unless you opted in to overdraft coverage. If you do not opt in, those transactions are usually just declined at the register or ATM, with no overdraft fee.

For checks and recurring electronic payments, such as automatic bill payments, the opt-in rule does not apply, and banks can still charge overdraft fees even if you did not opt in.

Which is better? Declining coverage means an embarrassing declined card now and then, but no fee. Opting in means the purchase goes through, but the fee may be far larger than the purchase. Many people prefer to decline coverage and use alerts and a buffer instead.

Cheaper backups

The CFPB describes two common alternatives that usually cost less than a standard overdraft fee:

• Linked savings: if you overdraw checking, the bank moves money from a linked savings account at the same institution. There is often a transfer fee, but it is generally lower.
• Overdraft line of credit: for people who qualify, the bank covers the shortfall with a small loan. You pay interest and sometimes a fee, which is usually still less than per-item overdraft fees.

Habits that prevent overdrafts

1. Turn on low-balance alerts at a level that gives you time to act, such as $100.
2. Keep a buffer in checking that you pretend is not there.
3. Line up due dates with payday. Many billers let you choose your due date; set them a few days after your paycheck lands.
4. Watch pending transactions. Your available balance can be lower than your current balance while purchases are pending.
5. Check before big autopays like rent or insurance, which are the transactions most likely to tip a low balance negative.

If you were already charged

Look at your statement to see exactly which transactions caused the fee. Then contact the bank, explain what happened and ask for a refund; banks often have some discretion, particularly for customers who rarely overdraw. If you believe you were charged a debit card overdraft fee without having opted in, you can dispute it with the bank and file a complaint with the CFPB.

A short script for asking

"Hi, I was charged an overdraft fee on [date] for [transaction]. It happened because [a deposit was late / I misjudged a pending charge]. I have set up low-balance alerts so it does not happen again. Could you refund the fee as a courtesy?" Keep it short, polite and specific, and note the name of the person and the date of the call.