The Major Reasons for Overdraft Fees

Posted by Rohit Mittal

Overdraft fees is the fee charged when withdrawal from your bank account exceeds the available balance, creating an overdraft. The bank charges you a fine or penalty in such a scenario, to cover the cost of the transaction, known as overdraft fee or non/sufficient funds (NSF) fee.

The average Overdraft fee in the United States of America has been going up consistently for last few years, increasing from $21.57 in 1998 to $32.74 in 2014. (Source: https://www.statista.com/statistics/325565/average-bank-overdraft-fee-usa/ )

Clearly, an overdraft in the United States of America is expensive!

Some of the main reasons for overdraft fees are-

An ATM Machine is ‘god-send’. It lets you withdraw your preset limit of cash as and when you require. And sometimes, when it is unable to communicate with the card holder’s bank, it authorizes a withdrawal even in case of insufficient balance. An ATM overdraft can be intentional or unintentional, but it comes at a cost.

  • Intentional Loan

When the account holder overdraws intentionally, it is known as an intentional overdraft short term loan. Here, you have made the overdraft intentionally and are willing to pay the price of this overdraft in lieu of this short-term loan.

  • Authorization Holds

When you make a purchase using your debit card, the electronic transfer of money requires merchant’s authorization for transaction to complete. Meanwhile, the bank holds this money for 1-5 days, making it unavailable to you. But if the merchant fails to authorize the transaction during this period, the hold falls off, making the money available to you. Spending this money can create an overdraft.

  • Merchant Error

A merchant error is the human error of charging more money than intended. Here, the merchant may swipe your card twice for the same transaction or input wrong digits, resulting in huge hold ups, creating an overdraft.

  • Account Holder’s Negligence

Negligence about one’s account activity may result in overspending, creating a deficit. It’s imperative to keep track of account activity log, taking into consideration the past and current transactions, leaving room for future electronic transactions, to avoid overdraft fees.

  • Automatic Electronic Withdrawals

Unexpected authorized electronic withdrawals, such as the initiation of a recurring service fee following a free trial period- these expenses are unaccounted for, and often forgotten by the account holder, creating an unintentional overdraft.

  • Unexpected Chargeback

An unexpected chargeback to a merchant account, for making an improper credit or debit card charge to a customer. It is possible for the chargeback and associated fee to cause an overdraft or leave insufficient funds for subsequent transaction.

  • Return Cheque Deposit

A returned cheque due to insufficient balance, may cost you return deposit fee and overdraft fee in case you have already withdrawn the amount of money that was to be made available.

  • Bank Fees

A lot of banks charge hidden fees, often unexpected by the account holder. This could create a negative balance or leave insufficient funds for subsequent debits from the same account.

  • Bank Error

Similar to merchant error, banks can also make human or computer error of posting improper amount on the cheque to be cleared. This could result in a larger deduction from account than expected, creating a deficit for other transactions, resulting in overdraft fees.

  • Intentional Fraud

A theft against one’s own account or any other account, that is, an ATM deposit with misrepresented funds is made or a cheque or money order known to be bad is deposited by the account holder, and enough money is debited before the fraud is discovered to result in an overdraft once the chargeback is made.

  • Identity Theft

The account may have been a target of identity theft. This could occur as the result of demand draft, ATM card, or debit card fraud, skimming, check forgery, an account takeover, or phishing. The criminal act could cause an overdraft or cause a subsequent debit to cause one.

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Conclusion

As inevitable as it may seem, overdraft fee can be avoided in most cases. As already stated above, overdraft is mostly due to negligence or error, barring a few cases of intentional fraud.

Hence, with mindful and smart banking, one can overcome overdraft charges and save a great deal of money.

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