Proof That Most Of Us Don't Understand Overdraft Fees

04/23/2015 01:38 pm ET | Updated Apr 23, 2015

Nine out of 10 Americans have a checking account. But many aren't up to speed on what happens if they overdraw their account, according to a new video from the Pew Charitable Trusts.

An overdraft occurs when you spend or withdraw more money than you have in your account. You'll be able to complete the transaction if you've agreed to your bank's overdraft protection policy, but you'll probably get charged a fee. If you don't realize right away that you've overdrawn, you might go on to make a bunch of other purchases, potentially racking up more fees as you go.

For its video, Pew interviewed a number of people on the street, asking them questions about their bank's overdraft policies. Most didn't know that overdrafts typically occur on transactions smaller than $50, or that banks can tack on a fee between $30 and $100 if it happens, or that banks can legally rearrange the order of your transactions and heap on more fees. What's more, banks make billions of dollars per year from these fees.

"The video shows people could use more information and feel overdraft fees should be more in line with banks’ actual costs," Susan Weinstock, director of Pew’s consumer banking project, said in an emailed statement to The Huffington Post. "We hope the Consumer Financial Protection Bureau will watch and take note."

The CFPB, which monitors banks' overdraft policies, also offers these tips on how you can reduce overdraft fees or avoid them altogether:

  • Always track your account balance.
  • It seems obvious, but the more you monitor your checking account, the less likely you'll be to overdraw it.

  • Opt out of your bank's overdraft coverage.
  • Most major banks allow you to change your overdraft settings at any time, and they post information for doing so online. Without overdraft coverage, however, you do run the risk of having your card declined for insufficient funds.

  • Link your checking account to a savings account.
  • Your savings account can transfer money to your checking account if it runs out of funds, providing a good buffer. Your bank might administer a small fee for each transfer, but that's usually lower than an overdraft fee, according to the CFPB.

  • Link a credit card to the account.
  • A credit card or a line of credit can also be used to transfer money to your checking account if you overdraw. You'll most likely have to pay for the transfer, plus interest -- but it should be cheaper than a typical overdraft fee.

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