The Difference Between Overdraft and Underfunding Fees (and How to Avoid Them)
Maybe you had to pay your dinner bill unexpectedly, or you needed to fill up your gas tank before your paycheck came in this week. If you don’t keep a close eye on your checking account, you can run into overdrafts and slide into a negative balance, and when you try to spend more money than you have in your account, you’ll end up with an “overdraft.” or fees for “insufficient funds”. Accidentally overdrafting your account by even a few cents can result in an outrageous $50 fee: here’s what you need to know about these two types of fees and what you can do to avoid them.
What is Overdraft Fee vs. Shortage Fee
The main difference between these two types of fees is whether your transaction is approved when your account is overdrawn. Your bank charges an overdraft fee when it covers the overdraft so your transaction is still going through. So, if you buy something for $50 and you only have $30 in your account, your bank will approve the transaction. However, they charge you an overdraft fee on top of the $20 you currently owe.
The bank charges a shortfall fee when it rejects a transaction on your checking account. This means that bounce checks or automatic payments don’t go through, which naturally leads to a host of other consequences for your finances.
Most banks have a limit (between $5 and $50) on the amount you can withdraw from your checking account. According to the Federal Deposit Insurance Corporation , the average overdraft fee is about $35. According to the Consumer Financial Protection Bureau , the average shortfall fee is $34.
The main conclusion: with the overdraft fee, the bank still covers the costs. With insufficient funds, the bank does not do this.
How to avoid bank fees
With a little due diligence, you can avoid overdrafts and underfunding fees. The most important thing, of course, is to stay on top of your finances and keep an eye on your account balance.
The smart move is to sign up for overdraft protection, which ensures that your bank automatically transfers money from a linked account when your checking account would otherwise be overdrawn. It costs money to sign up for overdraft protection, but the cost is probably worth it if you think you’re at risk of overdrafting your account.
An alternative to protecting your bank from an overdraft is to link your savings account to a checking account. Thus, any overdrafts are taken from your own funds. You can also sign up for low balance alerts on your bank’s mobile app to avoid overdraft altogether.