The short answer is that overdraft fees come from spending more money than what is available in a checking account, but in an article from USA TODAY, they had a nice graphic that tells us how these overdrafts are transacted. It should be no surprise that debit cards were number one on the list - generating 41% of all overdraft fees. Here's the full list of how overdraft fees are created:
| Overdraft Source | Percentage |
| Debit Cards | 41.0% |
| Checks | 30.2% |
| ACH/Electronic Debit | 14.2% |
| ATM | 7.8% |
| Other/Unknown | 6.8% |
The evolution of the 'free' checking account owes much of its thanks to the rise in debit card overdraft fees estimated at $15.785 billion last year. Compared to the old model of checking accounts with monthly fees of $5 to $12, the banks have come out well ahead by offering 'free' checking accounts.
These are certainly big numbers, but what's troubling on this list is the 7.8% of overdrafts created at the ATM. It seems to me that if there's no money in the account, an ATM should simply decline the transaction. This is exactly what consumers have been saying for years, and it looks like Citibank, Bank of America, and others are finally coming around to giving up their overdraft fees from ATMs (most of it anyway, you can still opt-in to paying these fees).
By the way, if you want to reduce your overdraft fees, the best things to do are:
- Pay all bills through your bank's online bill pay service - rather than having a check floating out there that you might forget about, the money is debited on the day the payment goes out. No more sneaky checks coming through for an overdraft fee.
- Separate your discretionary spending from your bill paying - if you boil down how much goes out in recurring bills versus how much you need as 'walking around money', you'll see that 70 or 80 percent of your money is gone before it ever gets to your wallet. Setup a single account for recurring bills and a separate one funded with automatic transfers for your day-to-day expenses. This way, you can manage a much smaller amount of money and eliminate overdrafts coming from checks and electronic withdrawals (44.8% of all overdraft fees).
- Use cash instead of your debit card - if you're not using your debit card, you can cut your total risk of overdraft by 41%. Find a bank with convenient ATM locations and go there instead of using the plastic.
My wife and I have been using this system for a long time, and as you can imagine, no overdraft fees.
The Process at Work
As promised at the outset of this year, it's all about principles and processes. In this post, we're looking at using a better process in managing cash flows in an effort to eliminate overdraft fees. If you use your bank's web bill pay, separate your bills from your discretionary spending, and use ATMs instead of debit cards, you can take overdraft fees out of your life.
Data Source: November 2008 FDIC Study of Bank Overdraft Programs



