How Banks Charge Us Overdraft Fees

How Banks Charge Us Overdraft Fees

Unfortunately, most of us at one time or another has experienced the dreaded overdraft fees. Banks used to charge consumers up to $35 for $1 overdrawn from a checking account. However, unless we understand how banks charge such exorbitant fees, we cannot protect ourselves.


This is a common bank practice. The way it works is like this: Over the course of a day, large transactions are cleared first followed by smaller payments.This practice also increases overdrafts.


How Banks Charge Us Overdraft FeesFor simplicity, let us assume you have $110 in your checking account. You make one purchase for $5, then another purchase for $105 and then one for $42. If banks clear your payments in the order they were made you would incur only one overdraft fee. However, banks first clear the largest one the $105 purchase, then the $42 and at the end the $5. As such, the consumer would incur two overdraft fees.


If we do not pay the overdraft fees and bring the account to zero, most banks even charge us even more, every 5 to 7 days. This is called “sustained overdraft” fees.

The sustained overdraft fees could range between $12.50 to $35 every five to seven days.

Thus, pay back the overdraft fees quickly to avoid being hit again and going further down in the red.


This is important to note that although the number of overdraft fees banks could daily charge a consumer has relatively declined due to congressional action, still the overdraft fees are increasing. In other words, the reasons for which banks could charge overdraft fees may have been reduced. Nonetheless, the fees have become more exorbitant.

In fact, most banks charge around $35 for every overdraft fees. This fee has increased from $30 in 2006 or so. Needless to say, overdraft fees represent a treasure trove for banks.


In fact, banks could tout various safeguards they have put into place to ensure a $5 purchase would not cost a consumer $35. However, the reality is that most consumers go over their account balance more than $10 or so. As such, this is extremely important:

To Keep Track of Account Balance; And
To Avoid a Purchase Unless There is Enough Money in Checking Account to Cover It.


Ask your bank to link your savings account to your checking account. By doing so, you make sure the over-protection money comes from your money and the penalty you pay is relatively much smaller, around $10, compared to $35 for overdraft fees.

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