Joe Biden Is Going After Overdraft Fees. Here's What It Means for Your Bank Account

Big changes might be coming soon to checking account overdraft fees. The Biden administration's Consumer Financial Protection Bureau (CFPB) is proposing new rules that could end overdraft fees as we know them.

This could be good news for bank customers, especially lower-income bank customers. Let's explore what the end of overdraft fees might mean for your bank account.

What are overdraft fees?

Overdraft fees are sometimes charged by banks when a customer tries to make a purchase and doesn't have enough money in the checking account to cover the purchase amount. When you "overdraw" or "overdraft" your checking account, the bank has to move money to cover that purchase -- or your purchase might be declined.

Many bank accounts offer the option to set up "overdraft protection," which enables you to keep swiping your debit card or writing checks from your checking account, even if you don't have enough cash in the account. With overdraft protection, if your account balance goes to zero, the bank will automatically cover the purchase with extra money from a linked savings account or credit card.

Why people don't love overdraft fees

Many bank customers don't love overdraft fees, but banks defend this type of fee as a necessary convenience charge to help customers pay their bills uninterrupted. If your bank account doesn't have overdraft protection and your account goes to zero, instead of overdraft fees, your debit card could be declined when trying to make a purchase.

The American Bankers Association (ABA) has recent survey data that says 77% of American consumers who paid an overdraft fee in the past year were glad to have their overdrafts covered, instead of having their payments declined. The ABA also argues that eliminating overdraft fees would "push consumers who need overdraft protection into the hands of less-regulated, more-costly alternatives" (presumably, payday loans and other non-bank credit services).

However, the Consumer Financial Protection Bureau (CFPB) seems determined to end overdraft fees, especially from the largest banks that have more than $10 billion of assets. The CFPB says that these big banks' average overdraft fee costs $35, even though most bank customers' debit card overdrafts are in the amount of $26 and are repaid within three days. The CFPB and President Biden describe overdraft fees as "junk fees" that drive up costs for lower-income bank customers, without delivering enough value.

What could come next for your checking account

The CFPB's proposed rule changes for overdraft fees are still being discussed and finalized, but there are a few big changes that could be coming to your checking account.

Lower overdraft fees (as low as $3)

The CFPB is suggesting that banks reduce the cost of overdraft fees, so that the banks offer this service as strictly a convenience, not a source of profit. The CFPB is proposing new limits, where overdraft fees could be as little as $3 (down from the current average of $35 per overdraft at big banks).

New overdraft credit offerings

Overdraft fees are unique in the banking industry, because they're technically a short-term loan from the bank -- but with overdraft fees, until now, banks haven't been required to follow the same rules that they follow for other lending. The CFPB is trying to end this loophole, and require banks to provide clear disclosures and other protections for overdrafts, in the same way that they do for credit cards and other loan products.

The new CFPB rules could lead more banks to offer overdraft credit options, where instead of being charged a flat fee, customers get to borrow a small amount of money (with interest) to repay their overdraft situations. Some banks and credit unions already offer small lines of credit that are attached to the customer's checking account.

Some banks are already eliminating overdraft fees

Assuming that the CFPB's new rule changes go through, the end of $35 overdraft fees could be coming soon -- perhaps as soon as Oct. 1, 2025. Some banks are trying to get ahead of the federal regulation, and are already taking steps to redesign their checking accounts to eliminate overdraft fees.

A few prominent banks that don't charge overdraft fees include the following.

Ally Bank

Ally Bank's CoverDraft℠ service lets you overdraw your account by up to $250 (for qualifying customers), and then pay back the money within 14 days -- with no interest or fees.

Capital One

Capital One has eliminated all overdraft fees, but it still lets you overdraw your checking account (in a few situations) with no fee.

Citibank

Along with free overdraft transfers from a linked savings account or money market account, Citibank offers a Checking Plus® line of credit to help customers bounce back from bounced checks.

Truist Bank

Truist Bank offers a unique (no-fee) overdraft option called the $100 Negative Balance Buffer. This buffer is available with the Truist One Checking Account for customers who qualify, and it allows customers to overdraw their account by up to $100 without a fee.

Bottom line: The CFPB's new overdraft rules could cause some big banks to be less profitable, but could drive positive changes in the personal finances of banking customers. Instead of getting hit with a $35 overdraft fee when you don't have enough money, the best checking accounts of the future will likely offer low or no overdraft fees, and/or a small line of credit or other personal loan products that can help you pay your bills without breaking the bank.