What Is an Overdraft Fee?

Top Class Actions’s website and social media posts use affiliate links. If you make a purchase using such links, we may receive a commission, but it will not result in any additional charges to you. Please review our Affiliate Link Disclosure for more information.

Overdraft Fee Definition

Overdraft fees are charged when a consumer who has signed up for an overdraft protection program attempts to make a transaction that pushes the account balance to zero. Because of the overdraft protection, the person is allowed to make the transaction; an advance from the bank or credit union covers the transaction, despite the insufficient funds. In return, according to Investopedia, the consumer is charged what is known as an overdraft fee, which varies from bank to bank but is generally around $35 per overdraft charge.

Other types of overdraft fees may be charged when the bank covers the transaction by transferring money from a linked account. For this, the bank will still charge a fee of around $11 per transfer.

A key component of overdraft programs that’s important to remember is that these fees compound; each time your account is overdrawn, you are subsequently hit with another overdraft charge. This can mean multiple overdrafts in a single day, which can quickly reach over $100 in overdraft fees.

An overdraft fee is not the same as a non-sufficient funds (NSF) fee, also known as “bounced checks” or “bad checks”, according to Investopedia. An NSF fee is charged when a checking account does not have the money to cover a transaction and the bank declines the transaction instead of paying it.

By contrast, overdraft fees are charged on transactions that are actually completed, despite the insufficient balance, because of the consumer’s participation in an overdraft protection program.

Overdraft protection is a service offered at a majority of banks and credit unions today. Consumers can only participate in an overdraft protection program after opting in; they must be given the option.

Unfair Overdraft Practices

While overdraft protection programs are meant to protect consumers—indeed, “protection” is right there in the name—some banks and credit unions may be engaging in unfair practices in order to wring the most money they can out of consumers.

There are a few primary methods banks may use to maximize the number of overdraft fees they can charge. One of these is by reordering transactions, that is, processing transactions out of the order in which they were made in order to push an account into overdraft faster. Then, each subsequent transaction will incur another overdraft fee, which can quickly compound.

Several institutions have been challenged over a practice of assessing overdraft fees based on the available balance instead of the actual balance. The available balance is likely to be lower than the actual balance, and therefore it can be depleted sooner, causing more transactions to qualify for an overdraft fee.

Overdraft Lawsuits

In the last several years, a number of banks have faced class action lawsuits filed over unfair overdraft practices. In some cases, these lawsuits ended in substantial settlements. However, just because there has been litigation so far doesn’t mean that these practices don’t continue. And while the Consumer Financial Protection Bureau used to investigate overdraft fee practices to determine if new overdraft regulations need to be added, potential future regulation does not help in situations where people have already been affected by excessive or unfair overdraft charges.

Filing an Unfair Overdraft Fee Lawsuit

If you have been affected by excessive or unfair overdraft fees, you may be able to file a lawsuit and pursue compensation. Top Class Actions can connect you with an experienced attorney who can help you determine if you have a claim, navigate the complexities of litigation, and maximize your potential compensation.