Although it can feel like a chore keeping up with your checking account balance, managing your cash flow can help you avoid high-cost overdraft fees. Spending more money than what’s in your account can be a negative hit to your credit score in addition to being expensive.
Overdraft protection is a feature that provides an extra layer of protection, 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.
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. If you don’t enable it and your account lacks sufficient funds, your bank may decline the charge.
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 that have insufficient funds will be declined. 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.
With overdraft protection, your bank automatically transfers the difference from your linked account. Keep in mind that some institutions will round up the transfer amount. For example, Citi’s Safety Check transfers enough funds to cover the transaction, but transfers are rounded up to the next $100.
How much does overdraft protection cost?
Many banks have decreased their overdraft fees or eliminated them altogether, but they typically range from $10 to $40 per transaction, depending on the bank.
The cost of overdraft protection coverage varies, but more banks are beginning to offer the service for free. Chase and Wells Fargo, for example, do not charge any money 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.
Pros and cons of overdraft protection
If you’re thinking about signing up for overdraft protection, be sure to weigh the advantages and drawbacks first.
Pros
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You’ll avoid other fees: If your payment is declined, you may end up with a bounced check or unsuccessful debit transaction, resulting in other fees or penalties. Overdraft protection helps you avoid these costs.
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Your payments will still clear if you don’t have enough funds: Some bills can have an impact on your credit score, such as a credit card bill or student loan payment. Overdraft protection helps prevent a late payment from showing up on your credit report.
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It might cost nothing at all: A lot of banks and credit unions offer overdraft protection for no additional charge.
Cons
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Multiple transfers can result in multiple fees: If your checking account processes more than one overdraft protection transfer a day, your bank might charge a fee for each individual transfer.
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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.
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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 and credit unions 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.
How to prevent overdraft fees
Overdraft protection isn’t your only option for avoiding overdraft fees and fees for insufficient funds. There are plenty of other ways to manage your money:
- Opt out of overdraft coverage: Banks and credit unions 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.
- 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 and credit unions allow you to set up notifications on your account when your balance dips 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 never miss a deadline, it’s not always the best route for variable expenses. For example, if your gas bill looks different every month, it might be better to set a reminder to manually pay it in your calendar.
Should you opt in for 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. 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.
The bottom line
Overdraft protection can give you an extra layer of financial security, save you the embarrassment of having your card declined and provide reliable funding in an emergency. The transfer fees are usually lower than overdraft fees.
If you keep track of your 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.
