Ask any financial expert (or even Google) how to achieve financial wellness, and on the results you get, saving money will be on that list. Along with reducing debt, committing to your personal saving is a critical step to achieving financial freedom.
Saving money can be hard enough. What's even harder is trying to save when bank fees whittle away at your savings without you even knowing it.
Keeping your own money becomes a lot harder when your bank is constantly charging you account fees. Watching for common bank fees and knowing the impact they have on your finances may help you avoid a checking account fee from hitting your account. If you can keep from handing it over to a big bank, that's a win.
Comparing five common account fees at megabanks alongside community banks and credit unions will help you see the advantage of thinking smaller.
One of the most common and costly bank fees applied to a checking account is the overdraft fee, or the ouch-that-hurts fee
An overdraft fee is charged when a withdrawal from an individual's bank account exceeds the available balance. This withdrawal might be from an online bill payment, a swipe of a debit card, or a scheduled payment that is automatically deducted from the account. The bank or credit union will then apply the fee to cover the cost of the transaction, plus the cost to the financial institution.
How common are overdraft fees?
When it comes to overdrafts, life happens and sometimes you have to pay for an unexpected bill or expense that puts your account balance below zero. Don't think you're alone. A survey by Morning Consult estimated 18% of Americans reported an overdraft of their checking account in December 2021.
Large national banks lead the way by having the highest average overdraft fee. Chase and Citibank both charge $34 per overdraft, and may even charge three or four overdraft fees in a day depending on how much the account is overdrawn. During the worst months of 2020, JPMorgan Chase, Bank of America, and Wells Fargo made $300 million in overdraft fees.
In 2021, the average overdraft fee was $33.58. For credit unions, that amount drops to $28.36. Community bank averages also tend to run lower than big banks. Fees generally may often be lower at community banks or credit unions.
Changes to overdraft fees
In 2022, many large financial institutions have begun making changes to their overdraft fees, such as lowering the fee, or adjusting the conditions when a fee is charged. For example, Bank of America announced it would reduce its overdraft fees to $10 in 2022.
Experts are watching these changes closely. There may be additional fees or services offered to consumers to make up the lost revenue for megabanks such as increasing the monthly maintenance fee or charging more for overdraft protection.
Many people think of NSF (non-sufficient funds) fee is another word for an overdraft fee — not exactly. The amount of an NSF fee is usually the same as an overdraft fee, and both are stressful. But there is a difference.
When you buy socks at the store or pay the lawn guy, your financial institution takes the money from your account to pay the merchant or Jason’s Landscaping Services. If there isn’t enough money in your account to cover the purchase or payment, an overdraft fee is charged to the account. Jason or the sock store still get their money. Your bank or credit union covers the payment.
An NSF fee is similar, but Jason does not get paid for making your lawn look neat and well kept. The bank doesn’t cover the cost of the socks either. When the merchant or service provider does not get paid, their banks might charge them a fee, too. Those merchants or vendors can pass those costs along to the consumer. It's like getting hit with two overdraft fees.
An NSF fee is more likely to be charged to an account if the account holder has opted to not participate in overdraft protection, which has a monthly service fee of its own.
Overdraft fee alternatives
To combat having to pay a high overdraft fee, most financial institutions offer at least one form of overdraft protection. These options provide immediate, or even preventative, options when a checking account becomes overdrawn.
Overdraft protection is the most common cushion for overdraft surprises. Your bank or credit union agrees to move money to cover the shortfall between your balance and the debit that put your account below $0. The money gets moved from another account that you designate. Usually, a savings account serves as your resource to pull money to cover the difference. A credit card that is connected to the overdrawn account may also be used, but this may accumulate interest if not paid in full during the current billing cycle (yep, another fee).
In addition to the monthly fee for the overdraft protection service, you may still be charged an overdraft transfer fee, but unlike the big $35 charge, it's closer to $10 per covered transaction.
Don't assume your checking account has overdraft protection. Legally, it can’t be automatically added to your checking account. You must enroll in the service. You may be offered overdraft protection when you open an account, but you can also add it to an existing account if your bank or credit union offers it.
Some financial institutions may be more inclined to charge an NSF fee if overdraft protection is declined, or if the account holder has a history of overdraft charges.
Overdraft transfer fee
Having a connected savings account is the first line of defense for an overdrawn checking account. You can easily transfer money if you realize you have overdrawn your account.
An immediate solution to overdraft and NSF fees is a service that links a second account to transfer money automatically to cover an overdrawn account. There is a fee for this service, but it is usually lower than paying an overdraft fee. It is often part of the cost of overdraft protection service.
An overdraft transfer fee may be a daily fee rather than a transaction fee. For example, if you have two transactions, like a bill payment that clears your account and a debit card purchase at the store, you could get charged an overdraft fee for each. However, if an overdraft transfer fee is assessed daily rather than per transaction, you would only get one fee for both transactions. This could be the difference between $70 in fees (without overdraft protection) versus $10 in fees (with a daily overdraft transfer fee).
Ask questions of your bank or credit union to understand how to enroll in overdraft protection, its guidelines for designating a backup account, and what the monthly, daily, and per-transaction fees may be.
Extended overdraft fee
There are ways to manage these unexpected fees as well as techniques to avoid them. If you do happen to overdraw your checking account make sure you don't let it linger for too long. If your financial institution charges an extended overdraft fee you will end up paying much more than you thought.
An extended overdraft fee is charged on a daily or recurring basis (like every five days, for example) if your account balance remains negative. The amount of this fee varies, but your best chance for avoiding it completely is with a credit union. Only 10% of credit unions charge their members an extended overdraft fee compared to over 90% of national banks.
These fees are not as large as the overdraft fee (closer to $5 per day), but they get added to your account taking the balance farther into negative territory. These fees are in addition to new transactions that may hit the account and incur new overdraft or NSF fees.
It's easy to see how all these fees can add up. There are many solutions, some of which can be automated, to make life easier.
Good news: out-of-network ATM fees are on a downward trend. Bad news: ATM fees still exist.
Better news: free checking accounts are more readily available to combat those ATM fees. Best news: we can name two checking accounts that also refund ATM withdrawal fees* and offer rewards.
There are actually two charges that comprise what we commonly think of as an ATM fee.
Surcharge — a fee imposed by the ATM owner for the convenience of using their machine
Foreign fee — a fee charged by your financial institution for using a machine outside of its network
According to Bankrate, through 2021 the average surcharge was $3.08 and the average foreign fee was $1.51. This gives an average ATM fee of $4.59.
Avoid ATM fees
You can avoid ATM fees in a couple of ways. Many point-of-sale locations allow for cash back and most of those do not include a fee to add up to $40 in cash in addition to your purchase. These amounts are usually limited to under $50, so they are only helpful when you need a small dollar amount.
Many credit unions use what is called a cooperative network. This system allows any member of a connected credit union to use connected ATMs for free. This includes shared branches where you can use this same connection of branches to conduct some transactions as if you are at your own credit union. This network includes more than 30,000 ATMs and 5,600 branches.
The easiest option is to open an account that reimburses your ATM withdrawal fees (subtle hint: Kasasa). This allows you to get cash at an ATM without a special search and have both surcharges and foreign fees refunded.*
Monthly service fee
This may be the craziest bank fee of all. A monthly service fee, also known as a monthly maintenance fee, is a fee you pay just to have the account. What?
In theory, this fee covers the overhead cost the financial institution incurs by providing you the banking service. For example, Bank of America charges between $10-$16 a month for their checking account options. $192 just to have a bank account? No, thanks.
These can sometimes be waived if you meet additional requirements, such as maintaining a minimum balance every month. Establishing a direct deposit that requires at least $500 per month. There are plenty of checking accounts that don't require a minimum balance or direct deposit.
Luckily, there are plenty of community banks and credit unions that offer free accounts. Many of those offer checking accounts that pay rewards even without a minimum balance.
More fees to watch for
While those mentioned above are the bulk of the fees you might encounter, there are smaller fees for additional, less common, services. For example, some banks and credit unions offer notary services or money orders and cashier's checks. The fees to obtain these services can be lower, or even free, if you use your local community bank or credit union.
Wire transfer fee
If you ever need to transfer a large sum of money, you may need to use a wire transfer. This is a secure way to send money directly from your bank or credit union to another financial institution. Expect to pay a wire transfer fee of $25-$30 on average. This amount will likely be higher if you are sending money to a bank outside the United States.
Foreign transaction fee
If you travel abroad and use your debit card, expect to be hit with a foreign transaction fee every time you swipe your card. This fee is usually a percentage of the transaction amount, usually around 3%. This includes a fee to the processors (1%) and a fee charged by your financial institution (2%).
As a percentage, the amount you may pay will be the same if you have ten $100 transactions or one $1,000 transaction. Be sure to find out in advance if your bank or credit union charges a percentage or a per-transaction fee.
Using a credit card may also incur a foreign transaction fee, so it's worth knowing how much of a fee you might be assessed to determine which might be more useful when making overseas transactions.
If you have a checking or savings account you rarely use — maybe one you opened back in college — you may be charged an inactivity fee. This fee may be assessed every month, usually after six months of no transaction activity.
If the balance is small, the fee may not be worth keeping the account open. If your inactive account is an account you want to keep open for future use, set up an automated transfer into your account, even if it is just $5 per month, to keep your account active.
An average inactive account fee is $10 per month so it's not a good idea to just let it sit. If it is a savings account with interest, that fee may be eating into your interest, so don't let that savings get sucked away.
Adding it up
The average checking account balance in 2019 was just over $10,600. Due to the influx of stimulus payments, that average increased in 2020. Savings account balances averaged $3,500.
Now, imagine that you have a monthly maintenance fee of $12 on your account. You use an out-of-network ATM twice a month. You've paid $252 to "save" your own money.
Many interest-earning checking accounts charge higher monthly service fees, as much as $35 per month. If you're an average American with an average checking account balance, it would cost you $528 in fees every year for that account. You'd need to earn 5% interest on your checking account just to break even!
Getting ahead of those fees
Here's the best way to beat those fees.
Use online banking to set up alerts that will alert you to low balances and help prevent some of these one-time account fees. You can also get daily notifications that will tell you your balance so you can move money from your savings account.
Get free checking. Just skip the accounts that promise to waive the fees if you jump through their hoops. Just get the free account (and we're happy to point you in the right direction.)
Get those ATM withdrawal fees refunded. Even if you rarely use an ATM, why would you ever pay anyone — your bank, an out-of-network bank, a random ATM in another town — just to get your own money?
We all make mistakes. We all have unique banking needs. It's hard to avoid all bank fees, but if you go by the numbers, choosing a local bank or credit union gives you a much better chance to avoid the fees.
*Qualifications, limits and other requirements apply. See financial institution for details.