Overdraft Fees: How They Work & How To Avoid Them

If you're hit with an overdraft fee, you're not alone. Here's what to do next.

There's nothing quite like the sting of a surprise overdraft fee in your bank account. Maybe the charge happened because a deposit was delayed or a forgotten subscription was renewed at the wrong time. Whatever the cause, understanding how overdraft fees work—along with steps you can take to prevent them—can help you better protect your personal finances in the future.

What Is an Account Overdraft Fee?

An overdraft fee happens when you spend more money than you have available in your checking account, and your bank or credit union covers the shortfall. In this situation, the financial institution is likely to charge you a fee for the transaction.

Let's say your rent payment is $2,000, but you only have $1,500 in your account. Your bank may still process the payment, but it may also charge a fee for covering the $500 gap. Each additional transaction that overdraws your account before you bring your balance back above $0 (including paying off your overdraft fees) could rack up additional charges.

How much you could pay for overdrafting

Overdraft fees can vary depending on your financial institution's policies. They typically range from about $10 to $35 per transaction. These fees can add up, especially if your account remains overdrawn or if multiple transactions post before your balance is restored.

In addition to federal regulations, some states have laws that affect how overdraft fees are structured. In California, for example, a new law is set to limit state-chartered credit union overdraft and insufficient funds fees to $14. That's another good reason to review your financial institution's policies closely.

Common Reasons Account Overdrafts Happen

Overdrafts can occur in several everyday situations. Here are some of the most common reasons—and how banks generally determine when fees may apply.

• If you've opted into your bank or credit union's overdraft protection program, the institution may approve one-time debit card transactions or ATM withdrawals even when your balance is too low. In those cases, an overdraft fee may be charged.
• If you haven't opted into overdraft protection, certain transactions, such as checks or automatic payments (ACH), can still be presented for payment. If the available balance is insufficient, non-sufficient funds (NSF) fees may occur.
• Deposits may not clear before a scheduled payment or withdrawal, which can lead to an overdraft if the available balance is lower than expected.
• Some institutions may assess daily or extended overdraft fees when an account remains overdrawn for a period of time.
• Multiple overdraft fees may occur if a large transaction is processed before smaller ones.
• Additional fees may occur if the institution attempts to process the same check or payment more than once.

Types of Overdraft Protection

Banks and credit unions can offer a few ways to help you avoid declined transactions when your balance runs low. Common types of overdraft protection include:

• Standard overdraft coverage: Your bank temporarily covers the transaction and charges an overdraft fee.
• Linked savings account: Funds are automatically transferred from your savings account to your checking account to cover the shortage. A small transfer fee may apply.
• Linked credit card or overdraft line of credit: Your bank advances funds from your credit card or a dedicated line of credit. You may pay interest or a cash-advance fee on the borrowed amount.

Before opting into an overdraft protection program, review the terms carefully. Even when funds are pulled from a linked account, your bank may still charge a transfer fee (or apply interest or cash-advance charges if using a credit card).

How To Avoid Overdraft Fees From Your Bank

The best way to avoid overdraft fees is to stay aware of your balance and understand your bank's policies. These habits can help:

• Use your bank's app or website to monitor your balance regularly.
• Set up alerts for low balances or potential overdrafts.
• Use budgeting tools or apps to track your spending.
• Keep track of recurring charges and subscription renewals.
• Set up direct deposit so your paycheck funds are available immediately on payday.
• Opt out of overdraft coverage if possible (your bank may still charge a non-sufficient funds fee if a payment is declined).
• Maintain a small buffer in your account to stay above $0.
• Review how your bank processes multiple transactions in a single day—this can affect how overdraft fees are applied.

What To Do If You're Charged an Overdraft Fee

If you're charged an overdraft fee, it's best to bring your account balance back above zero as soon as you can to prevent additional charges.

However, depending on your situation, you may have other options:

• Request a courtesy refund. Many banks will waive an overdraft fee as a one-time courtesy, especially if it's your first occurrence.
• Dispute unauthorized charges. Contact your bank right away if the fee resulted from a fraudulent or unauthorized transaction.
• Review your account terms. Make sure the bank followed its own overdraft policies and fee disclosures.
• Consider switching institutions. Some banks and credit unions have more flexible overdraft programs or lower fees.
• File a complaint. If you believe your fees were applied unfairly, you can submit a complaint to the Consumer Financial Protection Bureau.

Avoiding Fees and Staying Ahead

Overdraft fees can be expensive, but they're also avoidable. Staying aware of your balance, setting up alerts and keeping a small cushion in your account can help you stay in control. And if a fee catches you by surprise, act quickly: Reach out to your bank, ask questions and look into your options. A little attention now can prevent a lot of frustration later.

Make your money work smarter. With Synchrony Bank, you can find accounts and tools designed to help you stay on top of your finances—without the guesswork. Open an account today!