Whether by accident or out of necessity, many of us have — at one time or another — overdrawn our checking account. If you’ve done it, you probably got hit with one or more overdraft fees. Understanding how merchants and banks process overdrafts can help you anticipate and prevent unnecessary fees in the future.

What Is an Overdraft?

An overdraft occurs when you do not have enough money in your checking account or money market account to cover a transaction, but the bank pays it anyway.

Overdrafts come with a few benefits: They can save you the frustration of having a purchase declined and help you avoid late fees and other penalties charged by a merchant. An overdraft can also help ensure bills are paid. For instance, it may allow a loan payment to be processed that would have otherwise been returned unpaid.

A recent study by the Consumer Financial Protection Bureau reported that the average overdraft and non-sufficient fund (NSF)-related fees paid by all bank accounts in the sample that had one or more overdraft transactions in 2011 was $225. According to the study, young adults were more likely to experience overdrafts or NSFs than accountholders in other age groups. Accountholders in low-income areas were somewhat more likely than other accountholders in the sample to incur overdrafts or NSFs and were also more likely to incur high numbers of overdrafts or NSFs.

“Banks offer overdraft services as a benefit to their customers, and the services can provide needed funds in a pinch. But we never want to see someone dig themselves a hole they can’t climb out of,” says Jimmy Oliver, Senior Vice President, Consumer Deposits Product Manager at Regions Bank.

How Do Banks Process Transactions?

Checks, debit card transactions, and automatic payments can all trigger an overdraft. But the order in which these transactions are applied to your account may determine the number of overdraft fees you are assessed.

All transactions that come into the bank on a single day are processed according to a prescribed “posting order.” Historically, many banks have used a high-to-low posting order, which processes items from highest to lowest dollar amount. “This practice was used for years by banks to give customers the peace of mind that their highest-dollar payments, such as their mortgage or insurance payments, would clear first,” Oliver says.

But a high-to-low posting order could result in more overdraft fees. For example:

• You use your debit card to purchase coffee in the morning and a deli sandwich at lunch.
• You use the same card to fill up your car with gas on the way home that evening, knowing that the cost may be more than you have in your account.
• You assume items will clear in the order they occurred, and you’ll only be charged one overdraft fee as a result of the tank of gas.
• When the bank posts the most expensive purchase first — the tank of gas — it brings your account balance below zero.
• You’re assessed overdraft fees for that purchase, plus fees for each of the smaller purchases you made earlier in the day.

With this in mind, many banks are switching to a more chronological posting order.

No Substitute for Good Money Management

While understanding your bank’s posting order can help, the only sure way to avoid overdraft charges is by living within your means. Oliver recommends making a household budget and balancing your checkbook on a regular basis. Avoid impulse buying by taking a list with you when you shop. For households with shared accounts, give only one person control of the debit card and checkbook.

The effort you make up front to avoid overdrawing your account will save you money in the end.

Learn how Regions posts transactions to customer accounts.