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This 'nasty' bank fee costs some Americans more than $350 a year, but it’s '100% preventable,' says consumer advocate

“Banks are in a never-ending search for additional revenue.”

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You may be personally familiar with the pain of bank overdraft fees. If so, you're far from alone: Financial institutions made over $31 billion in revenue off these charges in 2020, according to data collected by the Brookings Institute. One of every 11 Americans incurs more than $350 in such charges annually.

And they're getting more expensive. The average nonsufficient funds fee (bank lingo for overdraft fees) hit a record $33.58 in 2021, according to a new Bankrate report. That's 11 cents higher than in 2020 and a 22-cent jump over the past two years.

"Banks are in a never-ending search for additional revenue, so it comes as no surprise that bounced check fees have gone up," says Edgar Dworsky, founder and editor of consumer advocacy website Consumer World. "Overdraft fees are nasty," he adds, but "overdraft fees are 100% preventable if the account holder is diligent in knowing their balance, and not cutting the time too close hoping that just-deposited [money] will clear in time."

Here's how the fees work, and some simple steps you can take to avoid them.

How you can end up paying multiple overdraft fees for one purchase

Overdraft fees vary by financial institution and location. Philadelphia has the highest average fee ($35.70) and St. Louis has the lowest ($31.60), according to Bankrate. Still, even the average charge of $33.58 is one of the priciest banks fees you can face. It's more than double the average $16.35 monthly service fee on an interest-bearing checking account and more than several times higher than the average $4.59 total cost on an out-of-network ATM withdrawal.

Depending on your bank or credit union, you could be hit with even more fees than you expect. Some institutions reorder the transitions you make on a debit card, meaning they process your daily purchases from highest to lowest instead of chronologically. This could cause you to pay additional overdraft fees.

Let's say you start the day with $100 in your checking account. You buy a $10 bagel in the morning, $30 in gas for the drive to work, and a $20 salad for lunch for a total of $60. You forget, however, that your $100 monthly gym membership processes today — and that afternoon charge causes you to overdraft. If your bank reorders those purchases, you'll overdraft on each item after the gym membership and incur three fees instead of one.

Some banks cap overdraft fees at 4 to 6 per day, but you may not get notified about the initial charge right away.

Banks are in a never-ending search for additional revenue, so it comes as no surprise that bounced check fees have gone up.
Edgar Dworsky
Founder and editor, Consumer World

Be diligent, and know your account balance

Frustration about overdraft fees has been bubbling among consumers and certain lawmakers. Senator Elizabeth Warren grilled JPMorgan CEO Jamie Dimon on overdraft policies in May, and "some banks have faced lawsuits on this very subject of unfair ordering," says Dworsky.

A handful of institutions including Ally Bank announced recently that they would forgo overdrafts, and more companies are creating apps and banking alternatives that eliminate the pesky fees.

If you find yourself getting charged extra, call your bank to see if you can have the fees reversed, consumer advocates suggest. It may make sense to shop around for another checking account, too. Not every bank processes transactions the same way and some will cut you a break on overdrafts.

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There are protections you can put in place. See if you can set up automatic transfers from a linked savings account that kick in when you would otherwise overdraw your account, says Linda Sherry, director of national priorities at the nonprofit education and advocacy center Consumer Action. You may incur a transfer fee, but it's typically much less than the cost of an overdraft.

You could consider an "overdraft line of credit, different than the banks' courtesy overdraft, which pays the overdraft but still charges the consumer," she says.

A third option is to let your bank know that you'd rather have debit charges declined at the point of purchase when you don't have enough in your account, instead of allowing charges to process that would trigger an overdraft.

Avoiding costly fees means keeping a close eye on your balance, Dworsky adds: "Customers shouldn't be plunking down their debit card or writing checks for more than they have in their account."