Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Dec 20, 2011

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When one reaches the decision to open a bank account they are faced with a variety of choices between big name corporations, smaller credit unions, confusing terms, potential monthly fees, different kinds of accounts that yield different kinds of monetary results… the choices available and decisions to be made can quickly become overwhelming. While it may be tempting to simply go with the cheapest or most popular options available, it is important for consumers to know what kind of charges, hidden or otherwise, the institution that handles their life savings may choose to impose on them. One such charge, that just so happens to be a charge many bank users encounter, is the overdraft fee.


If a consumer writes a check or makes a withdrawal from an ATM for more than the amount in their account, the bank calls this an overdraft. When an overdraft occurs, the consumer is charged a fee based on an arrangement they have with the bank. This fee can range from a quick $5 transfer fee to a massive recurring fee that holds an annual percentage rate (APR) that makes even the most severe payday loans look like charitable gifts.


Understanding Overdraft Fees


Traditionally, loans are given out to consumers only after correct paperwork is filled out and the appropriate signatures are acquired. But overdraft fees, which come in the form of what is essentially a high-priced loan, don’t necessarily require any consent; at least not by the traditional sense of the word. Rather, bank users sometimes subject themselves to high overdraft fees and overdraft plans upon opening an account that they are not aware of.


Overdraft fees can be equated to a high-priced loan because if somebody overdraws their account for a small amount, say $25, then they are subject to an overdraft fee. They are essentially paying to borrow the money they did not have. However, even the word “high-priced” is an understatement when it comes to overdrafts, because these fees are often charged daily. And this isn’t a few cents, or even a few dollars. The median price for an overdraft fee according to is $27.


That’s $27 every single day an account is overdrawn.


For the math whizzes out there, that equates to an APR of 3,520 percent. Average payday loans are nearly a tenth of that, weighing in at 370 percent. When it comes to the choice between acquiring a payday loan or overdrawing a bank account, borrowers will almost always come out on top by getting quick money from a payday lender.


A Valuable Lesson


The Chicago Tribune reported a story on a mother who was hoping to teach her son about savings and using banks. She and her son went down to a local bank and opened up a savings account.


After some time, the money in the son’s account depleted to a grand total of $4.85—not even enough for the ATM to allow him to make a withdrawal. So he left it alone until he could acquire more money to replenish his account. The problem was he failed to take into account the monthly charge on his account.


When the month ticked over, he was charged $9.95 in a monthly maintenance fee, overdrawing his account by $5.10. This threw his account into a downwards spiral in which began to accelerate at an alarming $28 per day.


The kicker? The bank had no obligation to inform him of his overdraft. According to, a site sponsored by the U.S. Department of the Treasury, individuals are responsible for knowing the amount in their account.


By the time the mother and son duo caught the out of control bank fees, their total bill was $229.10. That’s a hefty price for what was an initial loan of $5.10.


How to Combat Overdraft Fees


There are several options available to consumers when it comes to arranging how overdrafts are handled.


The most common, and unfortunately the worst, is called automatic overdraft protection. The name makes it sound perfect, which is why customers opt for it, or don’t even second guess it. Despite the name, however, there’s little to no protection offered by this plan. Automatic overdraft protection does not automatically protect the customer at all. Instead, it automatically informs them they overdrew their account after they do it.


So if a bank user has $100 in their bank account, and they try to withdraw $150, they’re permitted to do so. Only after they overdraw their account are they warned that they’ve done so. Another way of phrasing that is only after they’ve been hit with the average overdraft fee of $27 are they warned they’re guilty of overdrafting their account.


A better way of approaching overdrafts is to open up a second savings account or credit card account that is then linked to a bank customer’s primary account. In the event that customer overdraws his or her account, the overdraw will then pull from the safety account for a small fee (usually around $5). That way, the customer can use their checkbook or ATM card, and can be confident they will be saved from any recurring payment.


What About Those Without Extra Accounts?


Sometimes consumers don’t have enough to fill an extra savings account with buffer money, and sometimes they don’t qualify for credit cards. What can be done in this situation?


Bank users should avoid the overdraft fee through whatever means possible—often times that may come in the form of payday loans.


The benefit of payday loans is that they are available to virtually anybody who has a job and a bank account. If a consumer knows their account is running low, they should opt for a payday loan over taking an overdraft fee. This is particularly true if they know they can pay either off come their next paycheck. The difference between the average two week charge of $15 on a $100 payday loan and an overdraft’s $27 charge is large—especially to those riding that bank account solvency line.


Additionally, a payday loan can help pull somebody out of the downward overdraft spiral if they’re already caught in an accumulating debt trap. For a two week $100 payday loan, the fee is $15. For two weeks worth of overdraft fees, the average cost is around $378.


While payday loans come with risks of their own, they can be the perfect tool for saving an individual from a sinking overdraft trap.