What an overdraft actually costs
Nobody expresses an overdraft fee as an interest rate, and the reason is that the number is indefensible.
Suppose you are twelve dollars short on a Friday. A transaction goes through, there is a fee, and your next deposit lands on Monday. You borrowed twelve dollars for three days.
Run that through the same formula used for any other loan and the annualized rate comes out in the thousands of percent. Not a typo, and not a rhetorical flourish — it is what happens when you divide a flat fee by a tiny balance over a short period. A payday loan, which is widely and correctly described as predatory, is cheaper than this.
Why it feels different
Because it is not presented as a loan. It is presented as a penalty for a mistake you made, and people accept penalties for mistakes without doing arithmetic on them. The framing does most of the work.
What to do about it
Link a savings account as backup. If there is money in savings, it covers the gap. This is free here and it is the single most effective fix.
Or set the account to decline. The transaction fails, which is embarrassing for a moment, and costs nothing. For many people this is the right default, particularly on a debit card used for small everyday purchases.
Turn on a low-balance alert. Most overdrafts are not the result of a decision. They are the result of not knowing.
Know your real available balance. Pending transactions, held deposits and a card authorization at a gas pump all move the number that matters away from the number you remember.
The one case where paying the fee is correct
When what would have bounced is a rent or mortgage payment, or something that triggers a much larger late fee or a credit report entry. The overdraft fee is expensive; a reported late payment on housing is more expensive. Choose deliberately rather than by default, which is why we let you set that default yourself.