Overdraft protection is a feature that provides an extra layer of protection for your money, but it isn’t free. If you struggle to track the amount of cash in your checking account, it might be worth looking into overdraft protection options.
Although keeping up with your checking account balance can feel like a chore, managing your cash flow can help you avoid costly overdraft fees, among other consequences. Spending more money than you have in your account can result in a negative hit to your credit score, in addition to being expensive.
What is overdraft protection?
Overdraft protection is an optional service offered by most banks and credit unions to ensure your transactions go through when you have insufficient funds in your checking account. Rather than having your bank or credit union cover the cost of the purchase — which will incur a hefty overdraft fee — overdraft protection is designed to automatically transfer funds from a linked savings account or a line of credit.
While you may also be able to link your checking account to a credit card, make sure this service isn’t treated as a cash advance. Cash advances on credit cards typically have fees and steep annual percentage rates.
You’ll need to authorize overdraft protection before your bank will cover a transaction on an overdrawn account. Your bank might decline the charge if you don’t enable it and your account lacks sufficient funds.
How does overdraft protection work?
To set up overdraft protection, link a savings account or a money market account — typically at the same bank — to your checking account. In some cases, you can use a line of credit, too. If you don’t sign up for overdraft protection, transactions will be declined if you don’t have the funds in your account to cover them.
For example, if your utility bill is on autopay and your payment bounces, you’ll incur a late fee from your utility company on top of an insufficient-funds fee from your bank. But if you sign up for overdraft protection, your bank automatically transfers the difference from your linked savings account.
There are several types of overdraft protection that banks generally offer. Here are a few options you might come across:
Overdraft protection transfers
Overdraft protection transfers allow your transactions to go through even if your checking account has insufficient funds. In these cases, your bank automatically transfers the money from a linked savings account to cover the difference. Some banks offer this service for free, but that isn’t always the case.
Overdraft lines of credit
Any time you use a credit card, you borrow from a line of credit. An overdraft line of credit works the same way (minus the physical card).
When you opt for an overdraft line of credit, your bank pulls the funds from a line of credit to cover the difference in the case of insufficient funds. Just like credit cards, overdraft lines of credit often come with high interest rates, making this an expensive option if you overdraw your bank account frequently.
Overdraft fee grace periods
Some banks allow a one- to two-day grace period to get your checking account in good standing before charging an overdraft fee. However, you must bring your available balance out of the negative during this time to avoid an overdraft fee. Make sure you understand your bank’s policy and grace period time frame before you overdraw your account.
How much does overdraft protection cost?
Many banks have decreased or eliminated their overdraft fees. At other banks, the average overdraft fee ranges from $10 to $40 per transaction, depending on the bank.
The cost of overdraft coverage varies, but more banks are beginning to offer the service for free. Chase and Wells Fargo, for example, don’t charge for overdraft protection — which is much better than paying either bank’s standard overdraft fees of $34 and $35, respectively. Contact your bank or credit union to ask about any associated fees if you want overdraft protection services.
Should you opt into overdraft protection?
You should consider overdraft protection if you have a history of overdrawing your accounts or your bank doesn’t offer low-balance notifications. But overdraft protection isn’t always free, and you can end up paying steep interest fees if you aren’t careful. Read the terms and conditions to understand how the service works and how much you have to pay for it.
In addition, if you don’t have a linked savings account at the same bank as your checking account, think twice about whether you want to open another account there.
Pros and cons of overdraft protection
If you’re considering signing up for overdraft protection, be sure to weigh the advantages and drawbacks first.
Pros
You’ll avoid other fees: If your payment is declined, you may end up with a bounced check or unsuccessful debit card transaction, resulting in other fees or penalties. Overdraft protection helps you avoid these costs.
Your payments will still clear if you don’t have enough money in your account: Some bills have an impact on your credit score, such as credit card bills and student loan payments. Overdraft protection helps prevent a late payment from showing up on your credit report. It also helps you avoid late fees for these bills.
It might cost nothing at all: Many banks offer overdraft protection for no additional charge.
Cons
Multiple transfers can result in multiple overdraft fees: If your checking account processes more than one overdraft protection transfer a day, your bank might charge a fee for each individual transfer.
Transactions can still be declined if you don’t have funds in your linked account: If you don’t have enough funds in your linked savings account, the transaction will be declined and you could be on the hook for additional fees and penalties.
It can stop you from managing your funds: Overdraft protection offers peace of mind, but don’t let it prevent you from budgeting. It’s important to regularly review your banking activity to spot fraudulent activity and check in on your spending.
Are banks required to offer overdraft protection?
Banks are not required to offer overdraft protection. Even if they do, they get to decide how it works and whether they charge a fee for the service. Review your deposit agreement and account disclosures to learn how overdraft protection works at your bank and what it might cost you if you sign up.
Banks can’t automatically charge overdraft fees without your consent. If you don’t want your bank to cover transactions when you don’t have enough money in your checking account, say no to overdraft coverage.
How to prevent overdraft fees
Overdraft protection isn’t the only way to avoid overdraft fees and fees for insufficient funds. There are plenty of other ways to manage your money:
Monitor your account balance: Keep a close eye on how much money is in your checking account. With the ease of mobile apps and online banking tools, you can regularly log in to see what transactions have cleared and whether you need to transfer more money into the account.
Set up low-balance alerts: Most banks allow you to set up notifications when your available balance falls below a certain threshold. For example, you can sign up for an alert if your checking account has less than $100.
Avoid autopay for unpredictable bills: While autopay is a convenient feature that can help you avoid missing a deadline, it’s not always the best route for variable expenses. For example, if your gas bill is a different amount every month, it might be better to set a reminder to manually pay it in your calendar.
The bottom line
Overdraft protection can give you peace of mind, save you the embarrassment of having your card declined and provide reliable funding in the event of an unexpected expense. The transfer fees are usually lower than overdraft fees.
If you keep track of your bank account balance regularly, you shouldn’t need it, but if you want an extra layer of security, overdraft protection is a useful feature.
Editors’ note: An earlier version of this article was assisted by an AI engine. This version has been substantially updated by a staff writer.