Why Do Banks Charge Overdraft Fees?

Florence Desiata

Overdraft is when a bank allows your account to withdraw or transact, even with insufficient money. As a result, you’ll need to pay an overdraft fee. 

Why do banks charge overdraft fees instead of subtracting the money lacking on the next deposit? Find out here. 

Why Do Banks Need to Charge Fees?

According to overdraft laws, banks can either process or reject a transaction in your account when it doesn’t have enough funds to fulfill that transaction. If your bank allows it, they loan you money your account doesn’t have, so they must charge you.

The are four fees associated with overdrafts. They include the following:

Overdraft Fee

People sometimes refer to overdraft fees as “courtesy pay” fees. It occurs every time your bank approves a transaction that exceeds your available balance. But banks usually charge you only if you overdraw by less than $5.

When it’s above $5, you have to pay $30-$35 per instance. Banks charge a maximum of 4 to 6 overdrafts per day per account; some even allow up to 12 in one day.

Non-sufficient Funds Fee or NSF

Non-sufficient funds fees are also bounced check fees. A bank will charge this each time it stops a transaction that overdraws your balance. This fee and the overdraft fee usually cost the same.

Overdraft Protection Fee

Banks also provide an overdraft protection service that links your checking account with a savings account, a credit card, or another source of credit. Here you’re giving your bank permission for that other account to pay for the transaction.

Some institutions commonly charge somewhere between $10-15 per transfer. They won’t charge an overdraft fee because, technically, your account won’t go negative.

Extended Overdraft Fee

Sometimes called the sustained overdraft fee, financial institutions charge this if you have not replenished the funds in your account for a certain number of days.

Some banks charge once every 5 days, while some assess the fee daily until your account is out of the woods and your balance is back above zero.

How Much Do Banks Charge?

Below you’ll find some of the largest retail banks in the country and their corresponding fees:

BankOverdraft/NSFOverdraft ProtectionExtended Overdraft
Wells Fargo Bank$35.00$12.50$0.00
Chase Bank$34.00$10.00$15.00 every 5 days
Bank of America$35.00$12.00$35.00 every 5 days
US Bank$36.00$12.50$25.00 weekly
PNC Bank$36.00$10.00$7.00 daily

Tips On How To Avoid Overdraft Fees 

It’s possible to avoid overdraft fees by:

Opting Out of the Overdraft 

Call the bank and tell them to reject a transaction you made. With your permission, they will decline all ATM and one-time debit card transactions that exceed your account balance.

Linking An Additional Account

Usually, this is a savings account, but it can also be a credit card or a separate line of credit, which will cover the funds you need.

Making A Habit of Checking Your Balance

This can be a hassle, especially if you are very busy, so do this only before major purchases or essential bill payments.

Frequently Asked Questions

Are overdraft fees legal?

Financial institutions are legally allowed to charge overdraft fees when there isn’t enough balance in your account.

On the other hand, some transactions require you to agree to overdraft fees before banks can charge you. Suppose you don’t opt for overdraft coverage (i.e., agree to pay overdraft fees). Then the bank cannot impose the fees. Instead, they would decline the transactions.

Will my bank charge me for every overdraft? 

Depending on your bank’s policy, it is possible that you need to pay a fee for every overdraft. Banks usually charge $35 but could increase to $105 if you have three overdrafts in just one day. That makes it an unnecessary expense.

Do Banks Have Grace Periods?

Some banking institutions allow you to overdraft without charging you if you bring back your account balance to a positive amount within a specific number of days. Check with your bank if they provide this service.

The Bottom Line

Most banks allow overdraft fees for customers to complete their transactions even if they’re short on funds. Sometimes, this can be very helpful, but the charges can get expensive, especially when not paid immediately. It’s best to be aware of the status of your account so that you can avoid these fees. 

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