Does Your Bank Still Charge Overdraft Fees?

What Are Overdraft and NSF Fees?

When you use a check or debit card to make a purchase for more money than you have in your account, one of two things will happen. Either your bank will decline the transaction or—if you've set your account up this way—it will pull money from your savings account or overdraft line of credit to cover the transaction.

Your financial institution may also charge you one of the following fees:

• Non-sufficient funds (NSF) fees apply when the bank declines your transaction.
• Overdraft fees apply when the bank covers your transaction from your alternate account or overdraft line.

These fees are typically incurred on a per-transaction basis, meaning you can be hit with a fee for each purchase you make that your account balance can't cover.

Why Fees Declined During the COVID-19 Pandemic

Traditionally, overdraft and NSF fees have brought in significant revenue for banks. The CFPB estimates that banks and credit unions collected roughly $15.47 billion in overdraft and NSF fees in 2019, prior to the COVID-19 pandemic. In 2020, that revenue dropped 26%. What made overdraft/NSF fees decline?

• Account balances rose. Average account balances jumped 26.5% between 2019 and 2020 and continued to rise in 2021, according to the CFPB. Stimulus payments helped median balances jump by as much as 50%, according to a 2021 study by JPMorgan Chase. In particular, the balances of accounts held by lower-income families were 70% higher in July 2021 compared with July 2019, largely due to COVID-19 stimulus payments.
• Debit card transactions declined. The total number of debit card transactions in the first two quarters of 2020 fell 7%, according to the Pulse 2021 Debit Issuer Study. Less account activity may have lowered the odds of customers overdrawing their account.

Will Overdraft Fees Go Back Up Now?

Now that the economic effects of the pandemic have begun to normalize—and interest rates and inflation are on the rise—will overdraft and NSF fees go back up? The answer has two parts.

Overdrafts may become more common again. The rising cost of everyday items like groceries and gas could cause people to overdraw their accounts more often because their money isn't going as far. If fees declined during the pandemic due to higher account balances and fewer transactions, a return to normal (or a new inflation-fueled normal) today could mean more frequent overdrafts.

Fees themselves may be trending down. On the other hand, a few key factors are holding back a full resurgence of overdraft and NSF fees—at least for now. Why?

• The CFPB is looking to reform bank fees. The bureau is giving greater scrutiny to banks that depend heavily on overdraft fees and has already ordered penalties and restitution from certain banks.
• Fee-free checking accounts are gaining popularity. These include offerings from online banks Varo and Chime, credit unions like Alliant and a growing range of traditional banks that want to compete with established financial institutions.
• Many banks and credit unions are changing their overdraft programs. The CFPB has spotted the following trends among banks and credit unions:
  • Eliminating NSF and overdraft fees
  • Reducing the fees they don't eliminate
  • Limiting the number of fees you can be charged in a day
  • Raising the amount of negative balance needed to trigger an overdraft fee—for example, from -$5 to -$50.
  • Offering a grace period to bring your account back to positive before you are charged a fee.
  • Eliminating "extended" or "sustained" overdraft fees charged if your account remains with a negative balance for a certain period of time.

What Fees Will You Pay?

What you, personally, will pay depends on your bank. A quick scan of individual financial institutions reveals a mixed bag of fees and policies. Among the four biggest U.S. banks:

• Bank of America eliminated NSF fees in February 2022. In May it also dropped its $12 balance transfer fee for overdraft protection and reduced overdraft fees from $35 to $12.
• Citibank, an Experian partner, says it plans to eliminate overdraft fees, NSF fees and overdraft protection fees in the summer of 2022.
• Chase no longer charges a fee when a transaction is declined due to insufficient funds. When an overdraft is paid and your account is more than $50 overdrawn, a $34 per transaction overdraft fee may apply on up to three transactions per day.
• Wells Fargo charges $35 per item for overdraft services, up to three items per day. The bank does not charge a fee on overdraft items of $5 or less, or on transactions that were declined due to insufficient funds. The overdraft fee for Wells Fargo Teen Checking accounts is $15, and the fee won't be charged more than twice in one day.

Smaller banks, credit unions and online-only banks also vary in terms of the fees they charge, but consumers looking to avoid overdraft/NSF fees do have options. In addition to Chime, Varo and Alliant Credit Union (mentioned above), Capital One, Ally Bank and Discover all offer accounts that don't charge overdraft fees.

Because the market is changing, it's important to check the overdraft and returned item policies that apply to your account. Find out what happens if a transaction comes through when there aren't enough funds in your account to cover it. Do you have overdraft protection? What fees are associated with returned items and overdrafts? If you're not satisfied with your account terms, it may be worth looking elsewhere.

How to Keep Your Account Out of Overdraft

The most effective way to avoid overdraft/NSF fees is to avoid overdrawing your account. Although mistakes and mishaps can always happen—perhaps your paycheck is unexpectedly delayed or a fraudster charges $3,000 worth of electronics on your debit card—carefully managing your account can reduce your risk. Here are a few tips for keeping your account out of the red:

• Monitor your account balance frequently. Checking your account balance every morning is a good practice.
• Sign up to receive text alerts for transactions and low balances. Be conscious of account activity at all times.
• Keep a few extra months' worth of expenses in your account. Check your cushion regularly to make sure it's not being eaten away by rising expenses.
• Review your automatic payments. Consider closing up accounts you don't need or can no longer afford. If timing is a problem, you might switch off some automatic payments or route them to a credit card instead. You'll still want to pay your balance off each month to avoid interest charges, but you'll have less money automatically being taken out of your debit account.
• Rebudget. Your daily expenses may be changing even if you're doing the same things. Take a close look at your income and spending to see whether you need to make adjustments.