Overdrafts happen when you try to spend more money than you have in your checking account and your bank or credit union covers the transaction anyway. When that happens, you typically owe the overdrawn amount back—plus any overdraft fees the institution charges.
If overdraft fees keep showing up in your account history, it’s a sign your account settings (and your backup plan) may need an upgrade. Here’s how overdrafts work and the main options you can choose from to reduce or eliminate these fees.
What overdraft fees can really cost you
Overdraft fees vary by institution, but many banks and credit unions charge $30 or more per transaction. And because some institutions charge per overdraft, multiple purchases in one day can lead to multiple fees (though some set daily caps). Some institutions also add an extra fee if you don’t repay the shortfall within a few days.
Overdrafts can happen even when you’re trying to be careful because transactions don’t always update your balance immediately—or post in the order you expect.
Three practical overdraft choices to consider
1) Opt out of debit card and ATM overdraft coverage
If you opt out, your debit card purchase or ATM withdrawal is generally declined when you don’t have enough money in the account. The tradeoff is simple: you may deal with an occasional declined transaction, but you’re much less likely to get hit with overdraft fees for those debit/ATM transactions.
Important detail: A bank generally can’t charge you overdraft fees on ATM and one-time debit card transactions unless you opt in to that coverage.
2) Link your checking account to a savings account
With a linked savings account, if you overdraw your checking account, money can be pulled from savings to cover the difference. You might pay a transfer fee, but it may be less than an overdraft fee, making it a lower-cost “cushion” for shortfalls.
3) Ask about a line of credit (or linking to a credit product)
Some institutions may offer overdraft coverage through a line of credit, or allow linking overdraft coverage to a credit card or credit line. This can still cost money—there may be a fee when the credit line is used, and you’ll pay interest on what you borrow—but it can be cheaper than repeated overdraft fees for short gaps in cash.
You can change your overdraft decision anytime
If you opted in (or opted out) and later decide it’s not working for you, you can change your decision—just notify your financial institution.
Habits that help you avoid overdrafts in the first place
Even with the right settings, a few habits make overdrafts far less likely:
- Track your balance carefully (keep a running mental total, not just “checking once”)
- Turn on low-balance alerts by text or email
- Know when scheduled payments will hit (rent, mortgage, utilities, subscriptions) and the amounts
- Know when deposits become available so you don’t spend money that’s still on hold
A simple way to choose the “best” option for you
- If you want maximum protection from fees, start with opting out of debit/ATM overdraft coverage.
- If you want fewer declines but lower-cost backups, consider linking savings.
- If you occasionally need a buffer and can repay quickly, ask about a credit-based backup—but watch fees and interest.