How to Avoid Overdraft Fees

An overdraft happens when you spend more money than is in your checking account. Say you have $50 and make a $75 purchase. Your account goes $25 negative. Most banks charge a fee of $25 to $35 when this happens.

Banks call this "overdraft protection" or "overdraft coverage." That name is a bit misleading. It means the bank covers the transaction instead of declining it, then charges you a fee for doing so.

Here is the key fact: you can opt out of overdraft coverage on debit card purchases. If you opt out, the bank declines your card when you don't have enough money. You pay no fee. A declined card is mildly embarrassing. It is far better than a $35 fee.

Federal law says banks need your permission to enroll you in this coverage for debit card and ATM transactions. But many banks auto-enroll customers anyway. Call your bank, or check your account settings, to see your status and opt out.

A better option banks don't always advertise: link your checking account to your savings account. If you overdraft, the bank pulls from savings instead of charging the full fee. This transfer usually costs $5 to $12, or is free.

(Source: Consumer Financial Protection Bureau, consumerfinance.gov/ask-cfpb/what-is-an-overdraft-en-1035)