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Overdraft Protection | How It Works And How To Avoid Fees


Fees for using overdraft protection add insult to injury by charging you for overdrawing your account. And, unfortunately, these fees are rarely nominal.

Instead, the average overdraft fee is $34. That can add up quickly. especially if you’re already struggling to make ends meet,

Once you add overdraft fees into the mix, it can be even more difficult to catch up on your finances.
Luckily, there are ways to avoid overdraft fees. Let’s explore what you need to know.

What Is Overdraft Protection?

First, it’s important to understand what overdraft protection is. Essentially, overdraft protection covers your transaction when you overdraw your checking account.

The advantage is that you don’t have to deal with the embarrassment of a bounced check or a declined debit card. Plus, there won’t be any consequences from a missed payment, such as a late fee.

But there will likely be an overdraft fee. In order to front you the cash, most banks charge an overdraft fee. The exact amount will depend on the bank. But you’ll likely be looking at something close to the average of $34. 

How To Avoid Overdraft Fees

Although overdraft protection can be convenient, the fees are nothing to get excited about. With that, let’s cover all the ways you can avoid overdraft fees. 

Work With A Bank That Doesn’t Charge Overdraft Fees

The most obvious solution is to work with a bank that won’t charge any overdraft fees. That’s right! There are some banks that don’t even charge overdraft fees.

That means you can avoid the threat of an overdraft fee altogether by working with the right bank. Here are a few of the top banks that won’t charge you any overdraft fees:

  • Chime. Chime is committed to fee-free banking, which includes no overdraft fees. Plus, the bank offers the SpotMe service which will cover overdrafts up to $200. Learn more about Chime in our full review.
  • Varo. Varo doesn’t charge any overdraft fees, and they have two services to help. First, overdrafts will just be declined. Second, you can get a line of credit if you qualify which will allow overdrafts to go through subject to how much you have. You can learn more about Varo in our full review.
  • Axos Bank. Axos Bank offers an interest-bearing checking account with no overdraft fees. Take a look at this account here

The switch to a new bank could be the right way to avoid overdraft fees forever. Luckily, it won’t take more than a couple of minutes to set up your account at any of the banks above. Want more low-fee banking options? Check out all out favorite online banks for 2021.

Link To Your Savings Account

Depending on your bank, you might be allowed to link your savings account to cover any overspending in your checking account. Although you have to take a few minutes to set up the link, most banks won’t charge you a fee for this service.

If you decide to go this route, don’t forget about the withdrawal limits on your savings account. The federal government will only allow you to make six savings transfers per month. If you do over the limit for the number of transfers, you might have to pay a different fee.

Opt Out Of Overdraft Protection

When you opt out of overdraft coverage, the bank will no longer cover any overspending. Instead, it will simply decline the transaction if you don’t have enough funds in your account. Although this might be slightly uncomfortable, it will ensure that you won’t ever be slapped with hefty overdraft fees.

Set An Alert For Low Account Balances

You can avoid overdraft fees by constantly checking your account balance. But that can get old quickly. Luckily, you can set up alerts for low account balances.

When you receive an alert, you’ll know to avoid using your debit card until you add more money to that account. 

Apply For An Overdraft Line of Credit

Some banks offer a line of credit to customers looking to avoid overdraft fees. With this revolving line of credit, you would likely pay interest on the balance. But if you are able to pay off the charge quickly, the interest rate may be more affordable than an overdraft fee.

The good news is that most banks offer this option. The bad news is that you’ll likely need a solid credit score to unlock this opportunity. Does your credit score need a boost? Take a look at our guide on how to improve your credit score.

Use A Prepaid Debit Card

Not comfortable using a debit card but want to stick with plastic that doesn’t have any overdraft fees attached? A prepaid debit card could work for you.

You can use a prepaid debit card like a regular debit card at the point of purchase. But the card itself isn’t linked to any checking accounts. Instead, you’ll deposit funds onto the card to use when you need it.

Most prepaid debit cards don’t have any overdraft fees. But if there isn’t enough money in your account, then the transaction will be declined. Find out more about prepaid debit cards in our full guide

The Bottom Line

No one wants to see an overdraft protection fee hit their account. Luckily, there are many ways to avoid this unnecessary expense. In addition to all the ideas shared above, try to build up a buffer in your checking account and keep a close eye on your spending and bank balances throughout the month. For easy expense-tracking from your phone, check out our favorite budgeting apps.

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