The Truth About Overdraft Fees, Their History, Regulations, and Your Best Banking Options
Overdraft fees are a huge source of revenue for banks—and a massive headache for customers. If you’ve ever swiped your debit card only to realize later that you didn’t have enough funds, you’ve likely been hit with an overdraft fee.
In 2022 alone, U.S. banks collected over $9 billion in overdraft fees, disproportionately affecting people living paycheck to paycheck. Some banks have started eliminating or reducing these fees, but many still rely on them for profit.
This guide will break down:
- How overdraft fees work and why they exist
- The history of overdraft fees and key banking regulations
- Banks that charge the least (or nothing at all) for overdrafts
- What to do if you get an overdraft fee and how to prevent them
Let’s take a deep dive into one of the most hated fees in banking.
What Are Overdraft Fees and How Do They Work?
An overdraft happens when you spend more money than what’s available in your bank account. Instead of declining your transaction, the bank covers the difference—but then charges you a fee for the service.
For example:
- You have $10 in your checking account.
- You use your debit card to buy $50 worth of groceries.
- Your bank covers the extra $40, but then charges you a $35 overdraft fee.
- Now, instead of being $40 short, you’re $75 in the negative—making it even harder to recover.
Many banks also charge multiple overdraft fees per day. If several transactions hit your account before you notice the issue, you could rack up hundreds of dollars in fees.
| Fee | Description |
|---|---|
| Average overdraft fee | $30–$35 per transaction. |
| Maximum daily fees | Some banks charge up to four overdraft fees per day, adding up to $140 per day. |
Overdraft fees are one of the most expensive bank fees, often hitting those who can least afford them.
The History of Overdraft Fees (And Why Banks Love Them)
Overdraft protection was originally a customer service feature—allowing people to complete purchases without being declined. However, banks quickly realized it was a goldmine.
Before 2010, banks automatically enrolled customers in overdraft protection without asking. This meant that even if you didn’t want overdraft coverage, the bank would still approve transactions and hit you with fees.
In 2010, the Federal Reserve introduced new regulations requiring banks to get your permission before enrolling you in overdraft protection for debit card transactions. However, many people still opt in, often without realizing what it means.
Banks have fought hard to keep overdraft fees because they bring in billions in revenue every year. Even as some banks reduce or eliminate overdraft fees, others find new ways to charge customers for insufficient funds.
Overdraft fees started as a convenience but became a highly profitable business model for banks.
Regulations on Overdraft Fees and Other Bank Fees
Over the years, regulators have tried to rein in overdraft fees, but loopholes still exist.
Key Overdraft Fee Regulations
| Regulation | Details |
|---|---|
| 2010 Federal Reserve Rule | Banks must get your permission before enrolling you in overdraft protection for debit card transactions. |
| Truth in Savings Act (1991) | Requires banks to disclose all overdraft fees upfront. |
| CFPB Investigations (2022) | The Consumer Financial Protection Bureau (CFPB) is pushing for lower overdraft fees and stricter regulations on excessive bank charges. |
Many consumer advocates argue that overdraft fees should be banned entirely, but banks continue to fight against tighter restrictions. While some regulations have helped, overdraft fees still exist because banks lobby hard to protect their profits.
Best Banks for Low (or No) Overdraft Fees
If you’re tired of getting hit with overdraft fees, consider switching to a bank that doesn’t charge them. Some online and challenger banks have completely eliminated overdraft fees, while others offer low-fee alternatives.
Banks With No Overdraft Fees
| Bank | Notes |
|---|---|
| Chime | No overdraft fees, offers fee-free overdrafts up to $200 for eligible users. |
| Capital One 360 | No overdraft fees, allows overdrafts up to $200 with no penalty. |
| Ally Bank | No overdraft fees, automatic overdraft transfers from savings. |
| Discover Bank | No overdraft fees, automatic transaction declines to prevent overdrafts. |
Banks With Low Overdraft Fees or Better Overdraft Policies
| Bank | Notes |
|---|---|
| Bank of America | Lowered overdraft fees from $35 to $10. |
| Wells Fargo | Eliminated non-sufficient funds (NSF) fees, offers a 24-hour grace period. |
| PNC Bank (Virtual Wallet) | No overdraft fees if transactions are under $5, allows one fee-free overdraft per month. |
Many online banks have eliminated overdraft fees, while traditional banks are reducing them to stay competitive.
What to Do If You Get (or Might Get) an Overdraft Fee
If you accidentally overdraft your account, you may be able to avoid or reverse the fee if you act quickly.
How to Get an Overdraft Fee Waived
| Step | Action | Note |
|---|---|---|
| 1 | Call your bank immediately | Many banks will waive one overdraft fee as a courtesy, especially if you have a good history. |
| 2 | Deposit money ASAP | Some banks have a 24-hour grace period where you can bring your balance positive to avoid fees. |
| 3 | Ask for a refund | If it’s your first overdraft, customer service may be willing to reverse the charge if you ask politely. |
| 4 | Switch to a no-fee bank | If overdraft fees are a regular issue, consider moving to a bank that doesn’t charge them. |
How to Avoid Overdraft Fees in the Future
| Avoiding Overdraft Fees |
|---|
| Opt out of overdraft protection so transactions are declined instead of incurring a fee. |
| Set up low-balance alerts to notify you when your account is running low. |
| Use a bank with overdraft forgiveness or one that doesn’t charge fees at all. |
Banks can waive overdraft fees, but you have to ask.
Overdraft Fees Are Optional—If You Know Your Options
Overdraft fees are one of the most predatory banking practices, disproportionately affecting people who can least afford them. While some banks are eliminating these fees, others still rely on them for massive profits.
If you’re tired of overdraft fees, consider switching to a bank with no-fee policies, setting up alerts, or opting out of overdraft protection entirely. And if you ever get an overdraft fee, don’t be afraid to call your bank and ask for a refund.
Citations
- Federal Reserve: Overdraft Protection Rules
- Consumer Financial Protection Bureau (CFPB): Bank Fee Regulations
- Bankrate: Best Banks for No Overdraft Fees