Overdraft fees are one of the most expensive penalties banks can impose on their customers for failing to keep their accounts in good standing. These fees have also long been a focus area for regulators for this reason. Most recently, the Consumer Finance Protection Bureau published research in December 2021 showing that in 2019, financial institutions made $12 billion in revenue from overdraft fees, which significantly outpaced their earnings from other fees including account maintenance and ATM fees. While most banks at this stage publish information about their overdraft policies, it is often complicated and difficult to understand what your options are and what you might have to pay if your accounts get overdrawn. This article aims to answer as many of the questions one might have about overdraft fees to help clarify exactly what they are, the various types of fees that can be incurred, how you can avoid overdraft fees, how different bank policies work, in addition to highlighting actions some of the largest banks in the country have taken in recent months.

Topics Covered in this Article

What are Overdraft Fees?

An overdraft occurs when a customer’s bank account goes negative, which is usually the case because the pending payments on the account exceed the balance that is currently in the account. Financial institutions can decide to approve these transactions in which case the account becomes overdrawn (i.e. balances goes negative) or they can choose to deny these transactions resulting in nonpayment. How a bank or credit union handles this is really at their discretion. In the first case, where they allow the account to go negative, the account holder’s account is overdrawn and they will most likely have to pay overdraft fees as a result. In the second case, the account holder will likely have to pay a non-sufficient fund (NSF) fee because the financial institution blocked (and therefore returned) the transactions without paying them.

How Pervasive Are Overdraft Fees?

As mentioned above, research from the CFPB indicates that banks earned $12 billion from overdraft fees in 2019, which is obviously a very substantial amount. Our own research indicates that about 23% of consumers in the United States get charged at least one overdraft fee per year:

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Our own estimates based on our survey data and using an average overdraft cost of $36 led to a total annual overdraft fee burden to consumers in the United States of $9.5 billion (shoot us an e-mail if you’d like to see our calculations and assumptions). And remember, this is even though only 23% of the population actually incurs these fees each year.

The 5 Types of Overdraft Fees

If your bank account ends up in the situation described earlier where the balance in the account is not enough to cover the pending charges, there are a number of different charges you could end up incurring as a result. The 5 charges we cover below are far from an exhaustive list as each financial institution has their own set of rules and policies, but these are the most common:

  • Overdraft Fee – this is the standard fee that a financial institution will charge you if they approve transactions and your account to be overdrawn. It is usually charged per item and some institutions have a dollar limit on both the items that qualify and how negative your account must be before they charge you an overdraft fee. Based on our research, the most common overdraft per item fee is $36.00 as of this writing. This is the amount you will get charged for each item that puts your account into a negative balance above a certain level and above a certain price per item – both of which are at the bank’s full discretion.
  • Non-Sufficient Fund (NSF) Fee – as noted earlier, this fee comes into play if a financial institution declines the pending transactions in order to prevent your account from being overdrawn. In this situation you could instead get charged an NSF fee per item. Although it is a different type of overdraft fee, NSF Fees are very often the same amount as an overdraft fee, so approximately $36 per item.
  • Overdraft Protection Fee – banks and credit unions have varying policies on how to handle overdrafts and different tools and programs available to consumers to help resolve overdraft situations. A very common practice is to allow consumers that have other accounts with the bank to transfer funds from those accounts to cover the overdrawn account. For example, if your checking account is overdrawn by $75, and you have $500 sitting in a savings account at the same bank, with overdraft protection, you could transfer $75 from the savings account to bring your checking account back into good standing. This however can often come at a cost. The below table shows what 15 different banks may charge for overdraft protection transfers:

overdraft-fees-for-transfer

  • Extended Overdraft Fees – these fees are sometimes also called continuous overdraft or sustained overdraft fees, and are charged by financial institutions when your overdrawn account remains overdrawn for a specified period of time. Often this fee applies when your account has been overdrawn for 5 consecutive business days. The extended overdraft fee gets applied usually on the day after the specified period. This fee tends to be between $25 and $40 and is a daily charge, though many banks will cap the number of days.
  • Incidental Overdraft Fees – finally, there are also incidental fees you can get charged as a result of having an overdrawn account. For example, in situations where you have a savings account which you use to fund your overdrawn account, this could lead to you violating withdrawal limits on your savings account, which in turn results in additional fees per transaction above the specified limit for that account.

What Do Major Banks Charge For Overdraft Fees?

As discussed in the previous section, there are several types of overdraft fees. But focusing on the traditional (and most popular) type of overdraft fee, as the table below shows, these tend to run between $30 and $37 per item. This is an important point: the way overdrafts work, banks will charge you for each item that they allow to post that overdraws (or further overdraws) the account.

overdraft-fees-listed-by-bank

In addition, most banks also have a threshold (we like to think of it as a buffer) under which they will not charge you for an overdraft. This is what is shown in the “threshold” column in the table. Santander Bank, Chase Bank, Huntington and BMO Harris stand out for offering a decent buffer to their customers. So if your account is overdrawn at Chase Bank by $49.99, you will not be charged $34, however at Bank of America you would start incurring the $35 overdraft fees once your account is overdrawn by $1.01. Further, most banks have a limit for the number of overdraft fees they will charge you per business day which is what is shown in the “daily maximum” column.

How Overdraft Fees Work in Practice

To help illustrate how overdraft policies actually work and to shine a light on the complexities involved with overdrafts, we decided to create an example using Wells Fargo’s current overdraft policy as of this writing.

overdraft-fee-in-practice

In this example we start at point A. This customer has a Wells Fargo bank account that has $1,000 in it and also has several pending charges on Monday. These pending charges add up to a total of $1,195.50. On Monday night Wells Fargo starts its nightly processing and realizes that the balance in the bank account is not sufficient to cover the pending charges. If the account has overdraft protection – which is an optional service Wells Fargo customers can add – then funds from the account holder’s savings account or credit accounts can be used to bring the overdrawn account back to $0. In this scenario we end up at point B, the customer’s bank account is now at $0 since they were able to transfer $195.50 into their bank account to cover the overdraft. The customer has to pay Wells Fargo an overdraft transfer fee of $12.50 for facilitating this maneuver.¬†

However, if the customer does not have overdraft protection, then the bank gets to decide whether they will authorize the pending transactions or not.

  1. Blocks Transactions – if the bank decides to block the transactions to prevent an overdraft then only the first two transactions (which we assume are the mortgage and utilities charges) will actually post on the account, everything else is blocked. Wells Fargo’s current policy is to not charge its consumer customers non-sufficient funds fees for items Wells Fargo chooses to return unpaid. So in our example, the account ends up with a $0 balance (point C). Although Wells Fargo doesn’t charge NSF fees, the merchants (for example, the phone company) could impose fees for having their charges returned.
  2. Authorizes Transactions¬†– if Wells Fargo does authorize the pending transactions, then the bank account gets over drawn by $195.50. In this example we’ve assumed that of the pending charges, the mortgage ($800) and utilities ($200) are the first transactions to post, and so the remaining four transactions are what lead to the overdraft. However, even though there are four transactions, Wells Fargo will only charge a maximum of 3 overdraft fees per business day and so the customer incurs 3 charges of $35 or $105, leaving their account at a negative balance of $300.50 (point D).

Banks That Are Reducing or Eliminating Overdraft Fees

There has been growing focus on overdraft fees by regulators in the United States which isn’t much of a surprise given how significant the revenue generated from them are at the expense of the U.S. consumer. In response to this, there have actually been a number of large banks that have announced changes to their overdraft practices over the past few months:

  • Bank of America – the bank announced in January that they would eliminate NSF fees starting in February 2022 and would reduce their overdraft fees from $35 per item to $10 per item starting in May 2022. In addition to this, the bank will reduce its overdraft transfer fee from $12 to $0 in May 2022.
  • Fifth Third Bank – starting on June 23, 2022, the bank’s overdraft fee will be reduced from $37 per item to $0 per item.
  • Citibank – the bank announced in February 2022 that they plan to eliminate overdraft fees, NSF fees and overdraft protection fees by the middle of 2022.
  • Regions Bank – in January the bank announced that it would be eliminating overdraft protection transfer fees by the end of first quarter 2022 and eliminating NSF fees by the end of the second quarter of 2022. In addition to this, the bank will be reducing the number of overdraft fees that can be charged per day from 5 to 3.
  • First Citizens Bank – the bank announced in January a new approach to the overdraft fees including no longer charging its $36 NSF fee and lowering its overdraft fee from $36 to $10.

While these moves are clearly encouraging, not all banks have followed suit and in many cases overdraft fees still exist just to a lesser degree.

How to Avoid Overdraft Fees

There are actually several steps consumers can take to avoid having to pay overdraft fees. Even though you might be pretty good at having an idea of what the balance is in your account, the timing of pending transactions can often throw things off. These are 4 suggestions we think will help you significantly lower the odds that you end up in an overdraft situation:

  1. Prioritize Overdrafts – when you’re choosing your checking account, you should always examine what the overdraft policy is of the bank for that account. As we’ve discussed, the policies vary significantly by bank, and even by account type and tier within the bank. For example, banks that have higher thresholds are worth considering as they come with an embedded buffer to lower your chances of overdrawing your account. In addition, some accounts have overdraft services as an automatic feature while others do not. For example, at Chase Bank the Chase Secure Checking account does not have Chase Overdraft Services while the Chase Total Checking account does. The latter account has a higher monthly service fee, but might be well worth it if it saves you from having to pay even just a couple overdraft fees per year.
  2. Take Advantage of Overdraft Programs – this goes beyond the standard overdraft protection programs that are available. Wells Fargo for instance has a program called “Overdraft Rewind” where even if after nightly processing your account is deemed to be overdrawn, if you make an electronic deposit by 9am the following morning the bank will do a recalculation before assessing any fees. Fifth Third Bank has a feature called “Fifth Third Extra Time” which allows customers to make deposits to avoid overdraft fees up till midnight eastern time – however this is only available to customers that have Fifth Third Momentum checking accounts.
  3. Setup Automated Account Alerts – this is a no brainer and something everyone should have setup with their bank accounts. It is easy to do and doesn’t cost anything. Therefore even though you might think you have a great idea of the ins and outs of your bank account, by setting up these alerts you have an added defense layer against being in a situation where your account gets overdrawn because a transaction or two slipped through the cracks.
  4. Open a Savings Account – this might sound odd, but savings accounts are meaningfully less prevalent than checking accounts and some consumers don’t have savings accounts open at the same bank. Having a savings account funded and open at the same bank as your checking account provides you with another line of defense against overdrafts as the primary way to avoid the charge is by transferring funds from another account. The more seamless the process is, the faster and cheaper it will be.

Conclusion: Don’t be a Typical Millennial!

us-consumers-nsf-overdraft-fees

The latest consumer survey we conducted showed that Millennials significantly overindexed when it comes to overdraft fees and account for almost 50% of overdraft fees that are paid in the United States. We are yet to find a plausible explanation for this, but hope that having read this article you’re a lot more informed about overdraft fees and equipped with tactics to minimize how many of these fees you incur in the future.