Overdraft fees: what they are, why they matter, and how to avoid them

Recently, a rule designed to reduce surprise fees for everyday banking transactions was overturned, reopening the conversation about overdraft fees and their impact on Americans. While the legal and political implications are always evolving, one thing is clear: overdraft fees disproportionately hurt people who are already walking a financial tightrope.

We understand that the changes might seem scary and make you feel powerless. Research has found that most people are uninformed about overdraft fees. However, there are ways to prepare yourself so that you’re not caught off guard by them. It’s never too late to engage with financial education, so you can empower yourself with up-to-date information—and you can start small, right here, right now. 

Let’s unpack what overdraft fees are, how they work, and more importantly—how you can avoid them.

What is an overdraft fee? 

An overdraft is what happens when you make a transaction that exceeds the available funds in your bank account. Say you have $15 in your account, but your cell phone bill auto-charges you $90. Since you’re short $75, if your bank covers that payment, they’ll charge you an overdraft fee. Every bank is different, so be sure to check your bank’s overdraft policies.

The “service” of an overdraft usually comes at a steep price—it varies per bank, but could be up to $35 per transaction. And if you unknowingly make multiple transactions while your balance is negative, those fees can snowball fast. Imagine paying your phone bill, buying lunch, and filling your gas tank—three charges, three separate fees. That’s over $100 in transaction fees gone in a single day, just for being short on cash while needing to pay for everyday essentials.

Essentially, the bank is loaning you $75 to pay the phone bill and charging you an overdraft fee for the “service” of the loan. As with any loan, you, as the borrower, will pay interest on the outstanding balance. Sometimes, people choose to let their account overdraft because the interest on the loan is lower than the interest on credit cards—making it a favorable option in case of an emergency. 

Banks often frame these fees as a way to help you avoid declined payments. But they’re also a major revenue stream for banks. In fact, some of the biggest U.S. banks earn billions annually from overdraft fees alone.

What is transaction reordering? 

Transaction reordering, also known as resequencing or high-to-low reordering, refers to the practice of banks rearranging your transactions from highest to lowest. Let's say you have $50 in your bank account. You buy a $5 coffee, then you get a $7 sandwich, and two hours later, you buy a $60 shirt. Even though you didn’t go into overdraft till your third purchase, the bank can process these transactions in the order of $60, $7, and $5—as though you bought the shirt first— so you'd get charged three overdraft fees as opposed to just one. And, yes… it’s legal for banks to do this. Look into your bank’s policies to see if they still engage in the practice of transaction reordering. 

The real cost of overdraft fees

It’s not just the fee itself. It’s the ripple effect.

A $35 overdraft fee today might mean you can’t cover your internet bill tomorrow. That can lead to service disconnections, late fees, and even more financial stress. It’s a vicious cycle, especially for people and families already living paycheck to paycheck.

Overdraft fees hit the most vulnerable people the hardest—after all, they’re only charged to people who are low on funds. For everyday consumers, what’s framed as a financial service often becomes a burden.

What is overdraft protection?

Overdraft protection provides coverage when any transactions exceed the amount of money in your account. This service links your checking account to another account (like savings or a credit card) to cover transactions when your checking balance dips below zero.

The upside? Your purchase goes through.

The downside? It’s not always free. Some banks charge transfer fees, and if the linked account is a credit card, you might rack up interest. It gets even more complicated because while some banks don’t charge for the service of overdraft protection, if the linked bank account doesn’t have enough available funds to cover a payment, you’ll go into overdraft anyway and still be charged a fee. In other words, it’s worth checking the fine print before using this feature at your bank. 

How can I avoid overdraft fees?

Below, we’ll run through a few ways you can easily and realistically manage your money and avoid overdraft fees. 

Monitor your balance regularly

Staying on top of your account activity helps you make more informed spending decisions. Set recurring reminders until you develop the habit of checking your account regularly. Use your alarm app, sticky notes in visible places like your fridge door, or your calendar app to nudge you. 

Whether it’s a daily check-in or a weekly review, find a rhythm that fits your routine. Over time, these small check-ins add up to better financial awareness and fewer surprises when it comes to your account balance. 

Set up low balance alerts

Many banks offer customizable alerts that ping you when your balance drops below a certain threshold. ZayZoon also includes free tools to help employees monitor their pay and spending in real time, so there are fewer surprises—just connect your bank account to set up alerts. 

Use earned wage access (EWA)

Low balance alerts are helpful so you don’t accidentally go into overdraft. But what happens when your balance is low while you have a payment coming up and payday is still several days away? Some people resort to payday loans or credit cards, but there’s another option—earned wage access (EWA). 

With EWA, you can access a portion of your next paycheck early, so you can pay that bill and avoid overdraft fees. The money you accessed early is simply removed from your next paycheck because you already have it. With low fee payouts or even fee-free options, EWA is a favorable option to credit cards or payday loans that can lead to you paying back much more than you borrowed. 

Use budgeting tools and financial education resources 

Avoiding overdraft fees starts with understanding your money. As much as it might seem like it’s too difficult to start or maintain, making use of budgeting tools and financial education resources can help you lay the foundation for lasting financial wellness. For example, budgeting isn’t necessarily about restriction; it’s about reflecting on your habits, setting priorities, and making decisions that align with your short- and long-term goals.

ZayZoon offers free tools, like smart insights, to help you see your earnings and recent transactions in real-time. These insights make it easier to plan ahead, avoid overdraft surprises, and feel more in control of your finances. Our app also includes educational content designed to be approachable and actionable, covering topics like building credit, managing debt, and saving effectively.

Beyond ZayZoon, many community resources also offer free budgeting workshops and financial wellness sessions. Check out what’s available through your local library. Taking time to explore these tools can turn financial stress into financial confidence, one small step at a time.

Understand your bank’s policies

Every bank has its own rules when it comes to overdrafts, so take time to review your bank’s policies. This is what you need to know: 

• How much they charge per overdraft
• How many overdraft transactions they allow per day
• Whether there’s a “cushion”—a certain amount your account can go into the negatives before an overdraft is charged;
• And if your bank engages in transaction reordering, which we outlined above. 

If it sounds overwhelming to find this information, try talking to a bank representative over the phone or in person. It’s worth the extra effort to be informed now so you’re not caught off guard later. 

Understanding these policies empowers you to make informed decisions and helps you spot potential opportunities to dispute a charge if something doesn’t look right. And if your bank’s policy feels too aggressive, it might be worth exploring alternatives with more consumer-friendly practices.

Financial confidence starts here

Overdraft fees are avoidable. With the proper knowledge and tools, you can stay ahead of your account balance and skip the unnecessary charges.

At ZayZoon, we believe financial wellness means more than scraping by. It means feeling informed and confident in your ability to manage life’s ups and downs. If you’re ready to reduce financial stress and take control of your money, we’re here to help.

Looking for an easy, stress-free way to take small but mighty steps towards better financial health? Take the free Money Mindsets quiz! Money Mindsets guides you through some questions about your financial habits to help you understand how to save and spend in a way that makes sense for you. After the quiz, you’ll get a free personalized toolkit that supports your short- and long-term goals. Start exploring how ZayZoon can support your financial wellness!