What is overdraft protection?

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Losing track of your checking account balance is easy enough to do, yet it may lead to costly overdrafts when you swipe your debit card at the store, restaurant or gas pump. Overdraft protection can serve as a solution, as it automatically transfers money from a linked account when your checking account is overdrawn.

This bank-provided service helps you avoid the hassle and embarrassment of declined transactions, overdraft fees and returned check fees.

How does overdraft protection work?

Overdraft protection works by linking another one of your accounts to your checking account. Then, whenever you withdraw more money than you have in your checking account, funds are automatically transferred from the linked account to your checking account so the transaction will clear.

A per-transfer fee usually appies, but in most cases, it is substantially less than what you would otherwise be charged for overdrawing your account. It’s for that reason many banking customers consider overdraft protection to be a valuable service.

Many consumers opt for overdraft protection since overdraft fees tend to be steep. The average overdraft fee is a hefty $33.47, according to Bankrate’s checking account fee survey.

Types and costs of overdraft protection

There are several ways to arrange overdraft protection. One or more options may be available to you depending on where you bank.

These options include:

  • Linked deposit account: Another checking account or a savings account is linked to the protected account. You’ll likely pay a transfer fee when the protection is triggered, but that cost is still probably cheaper than paying an overdraft fee. You’ll need sufficient funds in your linked deposit account to cover the overdrawn amount to use this service.
  • Overdraft line of credit: This feature links your protected account to an established line of credit. You borrow against that line of credit to cover the shortfall when you overdraw. In addition to a transfer fee, you’ll pay interest on the borrowed balance until you pay it off.
  • Linked credit card: This service works similarly to an overdraft line of credit except the account is linked to your credit card. When an account is overdrawn, a cash advance from a credit card automatically covers the amount. You’ll usually pay a fee for the cash advance as well as the interest on the balance.

For overdraft protection that uses a line of credit or a linked credit card, it’s important to know the interest rate you’ll pay on any transferred balances. Rates vary by institution and account type. Review the terms and conditions before signing up.

A sample of banks and fees charged for different types of overdraft protection:

Bank Type Fee
Bank of America Linked deposit account $12 per occurrence
Chase Linked deposit account $0*
Citi Overdraft line of credit $10, plus interest on balance. The fee is waived for some accounts.
Commerce Bank Linked card 5% of the transfer amount (with a $10 minimum) plus interest at the cash advance rate

*($5 if the linked account is a savings account and there are more than six withdrawals from that account in a month.)

Do you need overdraft protection?

Whether you need overdraft protection is largely a matter of your spending habits. Overdraft protection could be a good way to avoid hefty overdraft fees if you overdraw your account frequently.

Overdraft protection isn’t always free. If you use a linked credit card or line of credit, you may run up a significant balance and end up paying a lot in interest if you don’t pay off the balance on time.

You shouldn’t have an issue if you use overdraft protection as a convenience to make sure transactions clear when you occasionally overdraft, and you quickly repay the cash advance.

Other ways to avoid overdraft fees

The simplest way to avoid overdraft fees is to keep an eye on your account balance and to stop spending or transfer money into your account if the balance gets too low. If your tendency to overdraw is driven by overspending, create a budget that better suits your spending patterns.

Choosing a bank that limits the number of overdraft charges per day is another way to help keep the fees at bay. Banks that cap the number of charges include Capital One 360, Chase and Comerica.

Some bank accounts, such as Varo and Chime, provide automatic overdrafts for free, recouping the shortfall when your next paycheck hits your overdrawn account.

You also can choose not to have your bank cover you when you overdraw your account. Neither overdraft protection nor automatic overdrafts are a requirement, and you have the right to decline either service. The transaction will simply be declined when you don’t have enough funds or an overdraft program. Be sure to check your bank’s policy on non-sufficient funds (NSF) fees, however. If the NSF fee is as much as the overdraft fee, opting out of overdraft protection won’t help you much.

You may even be able to negotiate with your bank to get an overdraft fee refunded. There are digital tools that allow you to monitor your account and initiate a request on your behalf, should you not want to contact the bank yourself.

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Written by
Karen Bennett
Consumer banking reporter
Karen Bennett is a consumer banking reporter at Bankrate. She uses her finance writing background to help readers learn more about savings and checking accounts, CDs, and other financial matters.
Edited by
Wealth editor
Reviewed by
Professor of finance, Creighton University