What are overdraft fees?

08/25/2021
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They’re the charge for overdraft protection services

Know what overdraft fees are so you can avoid them.

They’re the charge for overdraft protection services

Sometimes, your bank account balance can fall below zero if you’re hit with unexpected expenses or you haven’t kept close enough track of how much money is in there.

Ordinarily, your bank can simply decline excess transactions due to insufficient funds in your account. However, banks typically protect their customers by offering an overdraft protection service. This means that the bank will allow you to withdraw more money than you actually have in your bank account.

Enter: overdraft fees.

Overdraft fees are the fees that banks charge you when you withdraw more money than you have in your account. Basically, if the withdrawal you’re trying to make is greater than the amount of money in your account, and your bank’s overdraft protection service covers the transaction, the overdraft fee is what the bank charges you for providing such a service.

What you need to know about overdraft fees

To develop a basic understanding of what overdraft fees are, let’s consider:

1. Overdraft fees include the amount the bank lent you to cover the transaction that you lacked sufficient fees for. Thus, overdraft fees are a sum of the funds the bank advances and the bank’s charge for the protection service.

2. When opening an account, you need to opt into the overdraft protection service if you want it. This tells the bank you want them to cover you in the event of insufficient funds and that you agree to pay the associated fees if you ever use it.

3. Generally, overdraft fees don’t have a direct effect on your credit report or credit score. This is due to the fact that your banking history isn’t reported to the main credit reporting bureaus. However, if for any reason you don’t pay the overdraft fee (which includes paying the negative balance on your account), the bank might send the account to collections. If a collection account shows up on your credit report, it means that you’ve defaulted on your payment, and that could cause your credit score to drop.

How to avoid overdraft fees

Overdraft fees can take a toll on your finances if you have to pay them regularly. Thankfully, there are some steps you can take to steer clear of them. They include:

  • Opting out of your financial institution’s overdraft protection service
  • Monitoring your expenses and account balance closely and setting up balance alerts
  • Repaying any deficits quickly to cover the negative balance within the allotted time if the bank allows a grace period

Keep in mind that while it’s useful to have access to extra cash when you’ve miscalculated your budget or when a surprise bill hits, overdraft fees are a great source of revenue for banks. Just be mindful of whatever fees you’re incurring and make sure you pay them on time to avoid any damage to your credit.

Read our post on the various ways you can protect your credit for more tips.


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