Overdraft Fees Are Finally Falling. Here's Why

It's not uncommon for banks to charge extra fees to bring in more revenue. Overdraft fees are bank fees that can quickly eat away at your bank account balance. But many banks are shifting their fee practices by reducing overdraft fees or ditching them for good. This is excellent news for consumers' personal finances. We'll explain why overdraft fees are finally falling.

A closer look at overdraft fees and the history behind them

An overdraft fee is a fee that's charged when you don't have enough cash in your checking account to cover a transaction. If you write a check or swipe your debit card and the payment processes when you don't have enough money in your bank account, your bank may charge this fee. In exchange for the fee, your bank will allow the payment to go through.

According to the Federal Reserve Bank of St. Louis, overdraft fees were introduced by banks in the 1990s. While it was marketed as a convenience to consumers, this practice offered an easy way for banks to boost their profits. For years, banks made billions from overdraft fees.

The Consumer Financial Protection Bureau (CFPB) estimates that banks and credit unions collected nearly $15.5 billion from their customers through overdraft and non-sufficient funds fees in 2019. Unfortunately, these fees are often paid by consumers in vulnerable financial situations. Extra fees like this can make an already challenging financial situation much worse.

Overdraft fees are being reduced or eliminated

There's good news: Many banks are altering their overdraft fee practices. One reason is the mounting public pressure surrounding the practice. The CFPB and members of Congress have continued to put pressure on banks to reconsider this practice. Another reason some banks are lowering these fees is to be more competitive.

Now that some banks have decided to eliminate overdraft fees, consumers have more options. They can leave their existing banks that still charge overdraft fees and open a new account elsewhere where these fees are no longer being charged.

Ally Bank, Citi, and Capital One are some companies that have chosen to get rid of overdraft fees. Other banks are reducing these fees so they're more reasonable or have put a cap on how many times a customer can be charged these fees each day.

Huntington Bank reduced its overdraft fees to $15 per occurrence. The company also established a limit of three overdraft fees per day, and doesn't charge these fees unless an account is overdraft for more than $50.

Bank of America is another bank that has changed how it handles this fee. In 2022, the bank reduced overdraft fees from $35 to $10. The bank won't charge more than two overdraft fees per day. Additionally, some Bank of America accounts no longer impose overdraft fees.

Don't neglect to review fees before opening a bank account

While there has been significant progress regarding these fees, it's important to remember that many banks still charge overdraft fees. Whether you're considering opening a new checking account or savings account, carefully reviewing all fees is essential.

Even if a bank no longer charges overdraft fees, it may impose other checking account fees, like monthly maintenance fees. Many banks allow customers to avoid maintenance fees by meeting certain conditions, like enrolling in direct deposit or meeting minimum balance requirements.

Knowing about fees like this before opening a new bank account is critical to avoid surprise charges. If you're looking for a new bank account, check out The Ascent's 2023 bank and bank account awards list to learn more about the top banks and bank accounts.