Paying for overdrafts? You might be putting a hole in your pocket.

profile Jacqueline Ong  |  June 12, 2019

What’s the only thing worse than running out of money?

Getting charged a fee for running out of money! In fact, that’s exactly what overdraft fees do - talk about adding insult to injury. Adding overdraft protection might make it worse too.

Clearly, overdrafts are hurting consumers. Is there any way to avoid them? Read on to find out more.

What exactly are overdraft fees?

Overdrafts occur when you don’t have enough  money in your account to cover a transaction, but rather than tell you that, the bank allows the transaction to go through and penalizes you for it by charging you an overdraft fee. Not a small amount either - traditional banks may charge you an average of $34 per overdraft. On top of that, you still owe the amount of your original purchase.

Is that the same as an NSF fee?

On the other hand, non-sufficient funds (NSF) fees occur when you write or receive a bank check which bounces due to insufficient funds in the account. This could happen if you deposit an old check. These fees average out to be $30.

Why are they so bad?

Overdrafts are risky because they can add up quickly. Here’s an example:

Say you have $12 left in your account, but you forgot and tried to buy a $14 pizza. Instead of denying the transaction, it is allowed but in return for lending you $2, you're charged an overdraft fee of $34. If you’re not aware and you go on to buy a coffee and then pay for an Uber home, you could get charged.

So now, your account balance is now negative and you owe $102 in overdraft fees, all because you bought a few things. Not okay!

What about overdraft protection?

Some people get confused by overdraft protection because it sounds like if you have it you don’t need to pay for overdrafts, but that’s not true.

The bottom line is that overdraft protection doesn’t really protect you. What it does is let the financial institution approve transactions on your behalf even if you don’t have enough money, so you won’t ever find yourself in a potentially embarrassing situation, say having your card declined while you’re grabbing lunch with a coworker. This means you still incur those overdrafts.

Even then, opting out of overdraft protection isn’t foolproof. Most transactions that cause your balance to become negative will get declined, but some traditional banks may still let certain types of transactions go through and then charge you overcharge fees.

What happens if I don’t pay my overdrafts?

If your account has a negative balance and you are unable to pay back the amount within a given period of time (usually a month or two), the bank is likely to close the account and report the account to consumer reporting agencies. This makes it harder for you to open another bank account and might hurt your credit score.

So what should I do?

The best way to avoid paying overdraft fees is to not incur overdrafts at all. Consider opening a banking account that has no overdraft fees, like Current.

Current has no overdraft fees, no hidden fees, no overdrafts and no minimum balance requirement. Current’s personal banking accounts help you manage complex finances so you can get your money faster.

Get access to features like early paychecks, mobile checks, instant gas hold refunds and more when you sign up for our premium banking accounts.

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