What is overdraft protection?

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Have you ever lost track of your checking account balance and swiped your debit card when there wasn’t enough money in the account to cover a purchase? This could happen at the gas pump, in a restaurant, or at any other time you use your debit card to pay for something.

Overdraft protection is a bank-provided service that helps you avoid declined transactions or overdraft fees by automatically transferring money from a linked account when your checking account is overdrawn. This can save you from the embarrassment of a declined transaction or the aggravation of a steep overdraft fee.

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.

There is usually a fee for this service, but in most cases, it is substantially less than the amount you would otherwise be charged for overdrawing your account. It’s no surprise then that many banking customers consider overdraft protection to be a valuable service.

Types and costs of overdraft protection

There are several ways to arrange overdraft protection. Depending on where you bank, one or more options may be available to you.

Those options may 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 likely cheaper than paying an overdraft fee. To make this work, you’ll need to keep a sufficient balance in your linked deposit account.
  • Overdraft line of credit: Links your protected account to an established line of credit. When you overdraw, you borrow against that line of credit to cover the shortfall. In addition to a transfer fee, you’ll pay interest on the borrowed balance until you pay it off.
  • Linked credit card: Works in a similar way to an overdraft line of credit except the account is linked to your credit card. When you overdraft your account, you automatically take a cash advance from your credit card to cover the overdrawn 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. This rate will vary from institution to institution and by account type. Make sure you read any documents specific to your account before you sign up.

A sample of banks and fees that they charge for different types of overdraft protection are in the table below.

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 or not you need overdraft protection is largely a matter of your spending habits. If you overdraw your account frequently, then overdraft protection could be a good way to avoid hefty overdraft fees.

However, 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 down your balance after you overdraft.

If you are using overdraft protection as a convenience to make sure transactions clear when you occasionally overdraft, and you quickly repay the cash advance, then you shouldn’t have an issue.

Other ways to avoid overdraft fees

The simplest way to avoid overdraft fees is to make sure that you keep a close eye on your account balance. If it starts to dip too low, either stop spending or transfer money from another account.

Budgeting goes hand-in-hand with this suggestion. If your tendency to overdraw is driven by a looser budget, try to develop a budgeting system that suits you.

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

Also, understand that you can simply tell your bank that you’d rather not have the bank cover you when you overdraw your account. Neither overdraft protection or automatic overdrafts are a requirement, and you have the right to decline either service. However, make sure to check your bank’s policy on non-sufficient funds (NSF) fees. If the NSF fee is as much as the overdraft fee, this may not help you much.

You may even be able to negotiate with your bank to get an overdraft fee refunded. If you don’t want to contact the bank yourself, there are digital tools that you can use to monitor your account and initiate this process on your behalf.

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