Overdraft Protection: Opted out but Still Paying Fees?

Find out what's behind those hidden fees—and how to avoid them

Person depositing cash into an account to avoid an over drafted check.
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When you opt in to overdraft protection at your bank, your bank pays for transactions when you don't have enough funds in your account to cover them. In exchange, it charges you an overdraft fee of around $35.

But imagine a scenario in which you opted out of overdraft protection—that is, you told your bank simply to decline transactions when your account runs out of money. You may have taken care to pay bills only after verifying that you had enough funds in your account, but mistakes were made; maybe you bounced a check or overused your debit card. Somehow, even though you declined overdraft protection, your bank just made the payment for you and charged you an overdraft fee.

Understanding how this common scenario can occur can help you use overdraft protection more responsibly and avoid surprise overdraft fees.

The Cost of Overdraft Protection

The median—or midpoint—overdraft fee is around $34 for the nation's 50 largest commercial banks and $31 for a cross-section of credit unions and smaller banks in the U.S., according to the Consumer Financial Protection Bureau (CFPB). These numbers indicate that overdraft fees are a significant revenue generator for financial institutions—and a substantial cost for consumers.

Granted, a small group of people pay the bulk of overdraft fees—8% of those who overdraw their accounts more than 10 times per year pay around 75% of total overdraft fees. But if you count yourself among this group, you pay around $380 in fees per year on average, which can chip away at your bank deposits over time or even exceed the interest you earn on an interest-bearing bank account.

The CFPB estimated that Americans pay overdraft fees to the tune of US$17 billion annually, as of 2017.

Opt-In Requirement for Overdraft Protection

In 2010, the Board of Governors of the Federal Reserve System adopted a rule requiring financial institutions to get your permission to provide overdraft protection on your account. Before that, you could be charged for the service whether you wanted it or not. In many cases, you had to opt out of, or decline, the service to avoid the associated fee. Now, instead of turning off overdraft protection, you must opt in, or accept, overdraft protection for the bank to lend you the money to cover overdrafts when you're short on funds. 

The idea behind the 2010 rule was to prevent the “$39 latte,” which could happen if your bank charged a $35 overdraft fee on a small debit card purchase even if you were only a few cents short. Most people, understandably, would prefer to find a different way to pay in such a scenario, or just forgo the transaction. The opt-in requirement means you won't incur overdraft fees unless you've explicitly agreed to them, but it doesn't apply to all transactions.

Transactions Incurring Overdraft Fees

The ability to opt-out of overdraft protection only applies to certain types of transactions. Transactions that aren't covered under the federal overdraft opt-in regulations can cause problems.

In some cases, the transaction will be processed even if your account is opted out of overdraft protection and doesn’t have the funds available. When that happens, you’ll still incur an overdraft charge, and you’ll need to come up with the money to bring your account balance back above zero.

In other cases, your bank will reject the transaction, but you’ll still be charged what is known as a non-sufficient funds (NSF) fee for insufficient funds. NSF fees are comparable to overdraft fees.

No Fees for One-Time Debit or ATM Transactions

When you make a purchase with your debit card or withdraw cash from an ATM, your bank will usually prevent the transaction if you’re out of money and won’t charge you overdraft fees if you turned off overdraft protection. You can pay for the expense using another method or skip it entirely. In addition, you generally won't be charged NSF fees when your bank declines debit-based transactions.

Overdraft Fees for Recurring Payments

Automatic electronic payments aren't covered by the opt-in regulations for overdraft protection. This means that when you sign up for these payments, your bank might process them even if your account is opted out of overdraft protection and doesn't have enough money available. For example, you might incur an overdraft charge for a monthly membership fee billed to your debit card for insurance premiums deducted directly from your checking account every month via ACH. Alternatively, the bank can decide not to let the transaction clear, in which case you might still be on the hook to pay the NSF fee.

Overdraft Fees for Checks

Paper checks are still surprisingly common. Your bank’s online bill payment system might even be able to print and mail a check for you, which means you can make payments by check even if you don’t write the check yourself. Whether you write and send one the old-fashioned way or let your bank handle it, you run the risk of bouncing a check.

Any one-off checks that aren’t regular monthly payments can be processed by your bank, resulting in a negative account balance and hefty fees. However, each bank handles overdraft fees for checks differently. If the bank lets the check clear, you will likely incur overdraft fees even if you turned off overdraft protection. If, in contrast, the bank returns the check unpaid, it can still charge you the NSF fee. Contact your bank and ask what specific policies are in place for your account.

Avoiding Overdraft Fees

Passing on opt-in overdraft protection and knowing which transactions the opt-in provision applies to are the best ways to eliminate unnecessary fees. But there are a few other steps you can take to ensure that you never face an overdraft or NSF charge:

  • Monitor your accounts: Regularly log in to your bank account so that you know how much money is available. Use a spreadsheet or pen and paper to keep track of your balance following each deposit or withdrawal. When your balance gets low, ensure that no more payments hit the account until you can deposit new money or transfer money over from another account. Regularly balancing your account will help you keep tabs on how much money is coming in and going out, and you'll quickly spot any mistakes made by your bank before they cause costly headaches.
  • Sign up for alerts: Many banks let you turn on account alerts, which trigger a notification when you’re low on money or a check bounces. Even if you opted out of overdraft protection, a quick text message or email can help you avoid overdrawing your account and incurring fees.
  • Consider more affordable alternatives: If you have money in savings but often forget to transfer it over, see if your bank offers a less-expensive form of overdraft protection. You might be able to have the funds drafted from savings or cover the expense with an overdraft line of credit, which acts like a loan attached to your checking account. You may have to pay a transfer fee or a fee when you tap the line of credit, but these fees will generally be lower than standard overdraft fees.

Before you tap a line of credit attached to your bank account, remember that you'll have to repay what you borrow plus interest as you would for any other loan.

When Good Intentions Go Bad

Whether your account is or isn't opted out of overdraft protection, if you slip up and spend beyond your balance, it never hurts to ask your bank to waive the overdraft fee.

A polite email or phone call may well help you wipe the slate clean of an overdraft fee, especially if you're a loyal customer with considerable deposits in other accounts at the bank. But don't berate the bank if you're denied. Instead, stay calm and consider making an in-person visit to plead your case. Talk to the teller or customer service representative about waiving your fee. Even if the overdraft charge was your fault, you may be able to get it removed by being civil.

The Bottom Line

Despite federal regulations for overdraft protection that keep you from forking over overdraft fees when you don't opt in to the service, you may still incur overdraft fees for transactions that aren't covered under the opt-in provision. Namely, there's still a risk that you'll incur overdraft or NSF charges for automatic payments and checks.

These fees, while relatively small, can add up over time and make it that much harder to cover your monthly expenses or grow your savings. Using the tips above whenever possible can help you avoid or at least minimize bank fees. To overcome the problematic spending behaviors that can lead to an overdrawn account, you'll need to make deeper changes to your finances, including spending with your means and saving more.

Article Sources

  1. Consumer Financial Protection Bureau. "A Closer Look: Overdraft and the Impact of Opting-In," Page 1. Accessed March 27, 2020.

  2. Consumer Financial Protection Bureau. "A Closer Look: Overdraft and the Impact of Opting-In," Page 4. Accessed March 27, 2020.

  3. National Credit Union Administration. "Overdraft and Non-Sufficient Funds (NSF) Fees." Accessed March 27, 2020.

  4. Board of Governors of the Federal Reserve System. "Federal Reserve Announces Final Rules Prohibiting Institutions From Charging Fees for Overdrafts on ATM and One-Time Debit Card Transactions." Accessed March 27, 2020.

  5. U.S. Government Publishing Office. "The Overdraft Protection Act of 2009." Accessed March 27, 2020.

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  7. Consumer Financial Protection Bureau. "You’ve Got Options When It Comes to Overdraft," Page 1. Accessed March 27, 2020.

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  9. Consumer Financial Protection Bureau. "You’ve Got Options When It Comes to Overdraft," Page 2. Accessed March 27, 2020.

  10. Commonwealth of Massachusetts. "Consumer Alert: Overdrawn Accounts." Accessed March 27, 2020.