Definition, When You Might Need It

  • Overdraft protection is a service that allows you to overdraw your checking account.
  • Some banks offer services that cover your overdrawn checking account with money from a different account.
  • Overdraft protection service fees are different from non-sufficient fund (NSF) fees. 
  • Read more stories from Personal Finance Insider.

Swiping your debit card at the grocery store only to have it declined for insufficient funds or writing a rent check that bounces can be not only embarrassing but also costly because of the associated penalties and fees. Overdraft protection services, which most banks offer, are one way to avoid that embarrassment and reduce the costs incurred in such circumstances.

What is overdraft protection?

There are several types of overdraft protection all designed to do the same thing: cover you when you make a transaction in an amount that exceeds the balance in your account. Debit-card and ATM transactions will be approved, and checks will still clear even if you’ve overstretched your budget and don’t have enough money to cover them.

There are usually fees involved with overdraft protection, which will vary depending on your bank and the type of service you’re using. With increased competition in commercial banking, it’s also possible you might be able to find a bank that offers overdraft protection for no fee.

How does overdraft protection work? 

If you opt in to your bank’s basic overdraft protection service, it will cover the payment and charge you a fee when you spend more money than you have in your account, up to certain limits. The fees usually amount to about $35 per transaction. Plus, you have to redeposit the excess amount withdrawn. In some cases, those costs can add up quickly if you make multiple transactions before realizing that you’ve exceeded your balance.

Financial institutions can also offer other types of overdraft protection services, including:

  • Linked savings account: Most banks allow customers to link their checking accounts to another bank account, such as a savings account. When an overdraft occurs, the bank moves money from the savings account to the checking account. Banks typically charge transfer fees for the service that are usually smaller than standard overdraft fees.
  • Linked credit card: Some financial institutions will allow you to link your credit card to your checking account. If you perform a transaction that exceeds your account balance, your credit card will be charged. Your bank may also charge a fee for this service.
  • Line of credit: Some banks and credit unions also offer an overdraft line of credit. When you open a line of credit, your bank transfers funds to your checking account whenever you overdraw your account. The amount used to cover the overdraft accrues interest until paid off in full.

However, not all financial institutions charge overdraft fees. And the rise of online-only banks — also known as


, or challenger banks — makes it increasingly likely you’ll be able to find one that offers overdraft protection for either low fees or none at all.

“There was a time when almost every bank charged overdraft fees, but there is currently a movement to eliminate or reduce overdraft fees across banking,” says Jennifer White, senior consultant, financial services practice at J.D. Power.

Many people often confuse overdraft protection service fees with non-sufficient fund (NSF) fees. Without overdraft protection, your checks will bounce, debit card transactions will be declined, and funds transfers will not go through. When this occurs, most banks charge NSF fees. 

There are also other consequences that come with failed transactions, including merchant fees and cancellation of accounts. Since many people find such situations embarrassing, they enroll in overdraft protection that allows transactions to go through even with insufficient funds.

Example of overdraft protection 

Consider the following scenario. Let’s say John went to a local store to purchase some products and wrote a $1,400 check on a checking account with $900. Since John enrolled in overdraft protection by linking his savings account to a checking account, the check will clear even with the $500 less. However, the bank will charge him a transfer fee of $10 for the service.

Conversely, if John did not have overdraft protection, the check would bounce due to insufficient funds. The bank may also charge him NSF fees or even cancel his checking account in such a situation. The retailer would probably also seek a fee from John for bouncing the check. 

Do I need overdraft protection? 

“Overdraft protection can save you from the fees and hits to your credit rating associated with failure to make payments in a timely fashion,” says Ann Martin, director of operations at CreditDonkey. “In most cases, overdraft protection means that your bank will complete a transaction if you don’t have sufficient funds.”

Additionally, enrolling in overdraft protection can help cover emergency costs in times of crisis. Even if you don’t have enough cash in your checking account, transactions will still go through. While overdraft protection looks like a good deal, it has some drawbacks too.

Here are some of the pros and cons of overdraft protection.

Before enrolling in overdraft protection, it’s important to weigh the benefits against the potential downsides that come with the service. Also, considering your budgeting and spending habits will help you make a wise decision.

White says everyone should link their accounts in some way as a general safety net.

“This is important even if your bank eliminates fees for overdrafts because it is a strong financial management action on its own,” she White says. “It reduces your potential risk for fees (as many banks still charge for overdrafts) and allows peace of mind while managing your money. This protection, however, should be considered for irregular use as monitoring balances is a critical component of healthy financial behavior.”

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