If you've ever encountered the dreaded overdraft fee, you understand how debilitating it can be. An overdraft is a fee that banks apply when you spend more than you have in your account. Think of it as a charge your bank applies for taking a risk on that transaction and trusting you that you'll add money into your account to cover it.

Decades ago, overdrafts were a significant issue that made it difficult for many individuals to manage their money. Thankfully, things are different now, and federal laws protect consumers like you. Even still, it's important to understand what overdrafts are, how they work and what you can do to avoid them.

Modern Overdraft Policies

New laws passed in recent years changed how banks cover transactions and charge fees. By law, banks are not allowed to process debit card purchases that exceed your available balance. However, there is an exception if you sign up for overdraft protection.

Many banks offer overdraft protection to avoid that awkward situation at the cashier. You must agree to this service's terms, which include agreeing to pay the overdraft fee.

Keep in mind that laws differ for debit card purchases and checks. You can still get an overdraft non-sufficient fund (NSF) charge if you bounce a check.

How Much are Overdraft Fees?

The exact fee can vary from one financial institution to another. The average is around $25, but reading up on your bank's overdraft protection terms is a good idea to understand policies better.

It is possible to get a refund on overdrafts. Banks generally understand that extenuating circumstances happen and are usually willing to refund the fee if you contact them. Of course, that varies, and a habit of regular overdrafts may impact their refund decision.

The best thing you can do is to avoid overdrafts entirely. Consider investing in bill-tracking apps and financial management software to understand your financial situation. Be wary of your balance at all times and avoid overspending. You can also explore your bank's overdraft alternatives to prevent you from making purchases you can't afford.

Author Resource:-

Emily Clarke writes about cash advances, overdraft protection & finance apps. You can find her thoughts at overdraft protection blog.