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Intermediate

What is an overdraft fee?

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Managing family finances is a major part of parenting. When your family is financially secure, you'll find it easier to afford the things you need — like a baseball glove for your budding first baseman or a new dress for your teenager's homecoming dance. 

One financial issue that parents can agree on? Overdraft fees aren’t fun. These fees can catch you by surprise, resulting in unwanted expenses that put your checking account in the red. Learn all about overdraft fees and how to prevent them in this blog.

Understanding fees: the overdraft fee definition

We’ve agreed that overdraft fees aren’t fun. But what are they, exactly? An overdraft fee is an expense your bank charges for taking your checking account balance below a certain amount, usually $0. Most banks charge an overdraft fee when authorizing a payment that leaves your account overdrawn. 

Picture this: You have $50 in your checking account until tomorrow's payday. You go to the grocery store and buy $45 worth of food. Shortly afterward, your monthly Netflix subscription (a steep $15.49) hits your account. Your account is now overdrawn, and your bank will likely charge you an overdraft fee.

Subscriptions, outstanding checks, and even everyday purchases you make with a debit card can all lead to overdraft fees if you don't have enough money to cover them when the bank releases payment.

How do overdraft fees work?

The overdraft fee process is pretty simple. It's triggered when a charge occurs on your checking account, and you don't have the funds to pay it. Most banks will allow the charge to go through, but you'll have to pay an extra fee for not having cash in your account. 

It's possible to incur multiple overdraft fees for different transactions. Some banks charge you for every overdraft transaction, while others impose a single overdraft fee for each business day. You'll want to review your checking account's terms and conditions to understand your bank's policy.

Your account remains overdrawn and potentially exposed to additional overdraft fees until you deposit money in your checking account. Ideally, your deposit will cover any overdraft fees charged. It will also bring your account into positive standing, giving you enough money to cover future expenses.

How much are overdraft fees?

Overdraft fees can take quite a toll on your family's budget, especially if you incur multiple ones simultaneously. Most banks charge between $30 and $35 for each overdraft fee. To get your account in positive territory, you'll need to deposit enough to cover the overdraft fees, as well as whatever transactions took your account into the negative numbers. Of course, that's money you could likely spend on other things, like groceries, rent, or your car payment.

Remember that you'll need to take care of the overdrawn account quickly. If you don't, the bank may send you to collections, which results in additional fees and headaches.

How to avoid overdraft fees

Overdraft fees can be avoided by careful planning. Recurring payments are the most common source of overdraft fees. While they're convenient and prevent you from missing important bills, it's easy to forget when they'll come through your account.

Monitor any recurring payments you have such as digital subscriptions, or automated checking drafts such as rent and credit card bills. Consider adding them to a monthly calendar, so you know when they'll be withdrawn from your account.

It's a good idea to keep more in your checking account than you need. For instance, you might consider transferring an extra $100 or $200 to checking from savings and letting it sit there. If your balance drops below your buffer amount, you'll know you're in danger of overdrafts.

Pass down money smarts to the next generation

You can pass this overdraft knowledge on to your kids and give them the chance to show what they know with the Greenlight debit card. Greenlight is more than just a bank account. It includes unique features that teach kids responsibility, such as an allowance tied to completing chores.

Plus, with the Greenlight Level Up game, you can promote financial literacy in your home. When kids play our interactive money game, they learn the basics of personal finance — and lifelong skills they'll benefit from in the years to come. 

Don't let overdraft fees drag you down

An overdraft fee can be quite annoying, especially when you don't expect it. If multiple ones hit your account, you may find yourself in a tough situation that impacts your family budget. To avoid overdraft fees, pay careful attention to recurring payments set up for your checking account. Keep a payment calendar to help you visualize future bills and a buffer amount in your checking account for extra protection. To learn more financial wellness skills that benefit the entire family, explore our blog, and keep the whole family overdraft fee-free.


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