What are Overdraft Fees? (Should I Get Overdraft Protection?)

How freaking terrible is it that banks can charge us for not having money in our accounts?! If you’ve never been hit with an overdraft fee, count yourself lucky - you don’t know the pain.

If you have, you know how frustrating it is to find out that banks are quite happy to just add on extra fees and charges on TOP of your already incredibly low or non-existent balance.

Today, I’m going to talk about these terrible charges called: ‘Overdraft fees’.

If there’s anything I’ve learned researching for this post, it’s that overdraft fees are CONFUSING AF. But I’m going to do my best, and let you know everything I found: the types of overdraft fees you might face, the mystery of ‘overdraft protection’ and whether you should actually get it (banks are constantly trying to sell this!) and, most importantly, what to do to avoid the whole ‘overdraft’ thing altogether!

What does Overdraft Mean?

First, let’s explain what ‘overdraft’ means: Overdrafting is when you try and take out more money than you have in your account.

You can ‘overdraw’ by swiping/tapping a debit card for an amount larger than the balance of your account, writing a cheque with an amount larger than what’s in your account, trying to withdraw more cash than you have in your account at an ATM, or having a pre-scheduled automatic payment try to go through that’s larger than the amount in your account. Basically anything you try and do in your bank account, if you don’t have enough of a balance to do it, you’ll be in ‘overdraft’. (Here is an article by the Financial Consumer Agency of Canada that explains more!)

When this goes down, two things can happen. You either get an NSF fee, (a Non-sufficient funds fee) Or, your hit with an overdraft fee.

If you DON’T have overdraft protection, your card or payment will be rejected and you’ll be charged a NSF fee. In Canada, the average NSF fee is $45, and in the states it can range anywhere from $27-$35.

Yep. That means if you swipe your debit card for say, a $5 coffee but only have $2.50 in your account, it can turn into a $50 coffee!! What’s worse, is that banks charge this multiple times a day. So if you swiped that card, then also had a few automatic payments you forgot about try to go through you could be charged upwards of $150 in extra fees! (Here is a list of the overdraft fees charged by major banks)

Usually, banks set a daily limit on charges like this, but from what I’ve researched that ‘limit’ is almost always over $100 a day. So, how do you avoid charges like this? That’s where Overdraft protection comes in.

Now, I have to give a little warning here, I’m a bit biased on this. When I was overdrafting my account of course the bank teller convinced me I NEEDED overdraft protection and I paid this useless fee for a LONG time. I finally realized what it was, and cancelled it, but as soon as I did, each time I went into the bank, I was given the whole ‘overdraft speech’ because they must have seen on my file that I opted-in before.

There was also a time for a while where I was paying overdraft protection without my opt-in consent (it was this whole thing with TD) So, yea overdraft protection is a bit of a touchy subject for me. BUT, I’m going to do my best to explain it as open and non-judging as possible, because I believe we all have the responsibility and right to make the financial decisions that best fit our lives regardless of what anyone else thinks.

What IS Overdraft Protection?

When you have overdraft protection, those charges you make when you don’t have enough funds actually get accepted, making your account ‘negative’. You still get a charge, but it’s usually lower than what you’d pay with an NSF fee. Now, banks do this in a few different ways:

Sometimes, it’s a monthly fee (called an ‘overdraft protection charge’) that’s added regardless of if you overdraft in that month or not. Other times, it’s a charge (called an overdraft charge) that’s added every time you overdraft your account (so you could be paying it multiple times a day, or multiple times a month, it would just be a cheaper fee than an NSF fee)

In these cases, you’d be paying back the bank the amount you ‘borrowed’ as well as the fees added, AND sometimes additional interest fees depending on how long it takes you to pay your balance back. Another option that’s sometimes available is overdraft protection by linking accounts.

If you overdraft in your chequing account, linking the accounts would allow the bank to take from a different designated account (which can be chequing or savings) sometimes it can even attach to a credit card or line of credit. Of course, if there isn’t enough money in those accounts either then you’re still borrowing from the bank, and there are of course fees every time the bank makes that transfer for you, but sometimes this option is better for saving on those interest fees!

How do you know if Overdraft Protection is right for you?

So, how do you know if overdraft protection is the right option for you?

If you find yourself overdrafting on a regular basis, and you’re paying a crapton of NSF fees, getting overdraft protection is better than nothing. If it’s between NSF fees, or overdraft protection: Yea, overdraft protection is cheaper. BUT, my personal stance, as well as my professional opinion as a financial coach, is that you shouldn’t be paying ANY of those fees.

You should never be overdrafting in the first place.

I know, time for some tough love here, but come on, just save yourself the headache and stress. Here are a few ways to avoid overdrafting your account.

How to Avoid Overdrafting your Account:

Low Balance Notifications:

Every bank I know has a free service that you can opt-in to that lets you know if you have a low balance on your account. Sometimes it’s an email, or if the bank has an app they can let you know by push notification on your phone, just google your bank or contact them to ask! That way, you’ll always know when your account goes below a certain amount.

Check-in’s:

No, you don’t NEED to check your bank account every single day. There are two ways to do this: If you’re into daily check-ins, then by all means, go for it that will totally help! But I don’t want to force you to think obsessively about your accounts. A check in with your accounts, once a week or a few times a week, will at least give you an idea of where you’re at with everything.

If during your check, you see a lower than normal balance, then you’ll know to slow down your purchasing and check more often to make sure you’re not overdrafting. As I mentioned, banks can charge these fees multiple times a day so even one day of overdrafting can make a HUGE dent in your accounts.

Tracking Auto-Payments:

Knowing exactly what autopayments are coming out, and WHEN they’re coming out is essential to staying out of overdraft. The top reason people get into overdraft, isn’t because they don’t know the balance of their account, it’s that they’re not tracking all the money coming in and out of their accounts.

It’s super easy to think you have enough balance to make a purchase, but forget about other things you bought that day, the auto-payments you scheduled 3 weeks ago, or those little $2 ATM fees that add up quickly!

If you’re having trouble with this, or need more information, this post on being responsible with your money will really help you understand how to actually plan for these expenses, and how to track them!

One Last Tip: Ask your Bank for a Refund!

Don’t be afraid to ask your bank for a refund of these charges! Often, they will! Especially for a first offence, banks are usually willing to work with you on reimbursing fees like this. It never hurts to ask!

Let me know in the comments down below: have you ever been hit with a mystery fee in your account? Did you ask the bank to reimburse it?