Key takeaways
- Overdraft protection is a service that covers transactions that would otherwise bring your bank account to a negative balance.
- When overdraft protection kicks in, money can be transferred from a linked savings account, a credit card or a line of credit.
- Some banks charge a fee when an overdraft protection transfer takes place.
- Overdraft protection is an optional service, so customers can choose not to receive it.
It’s easy enough to lose track of your checking account balance when you swipe your debit card at the store, restaurant or gas pump, yet the resulting overdraft fees can be costly. One way to avoid such charges is overdraft protection, which automatically transfers money from a linked account to keep your account from being overdrawn.
Opting in for overdraft protection from your bank helps you avoid the hassle of declined transactions, overdraft fees and returned check fees.
How does overdraft protection work?
Overdraft protection automatically transfers money into your checking account when you initiate a transaction that would otherwise bring you to a negative balance. It does this by linking the account to another deposit account, a line of credit or a credit card. The bank may charge a fee for such transfers, although it may be less than what you’d otherwise be charged for overdrawing your account.
Many consumers opt for overdraft protection since overdraft fees tend to be steep. The average overdraft fee is a hefty $27.08, according to Bankrate’s 2024 checking account fee survey.
To illustrate an example of overdraft protection, suppose your checking account has a balance of $40, and you make a debit card purchase for $50. You have a linked savings account set up for overdraft protection transfers. When you swipe your debit card, it initiates an automatic transfer from your savings to your checking account to cover the additional $10 you need for your purchase.
Depending upon where you bank, options for arranging overdraft protection may include:
- Linked deposit account: Another checking account or a savings account is linked to the protected account. A fee may be assessed for transfers, but this may be cheaper than paying an overdraft fee. You’ll need sufficient funds in the linked deposit account to cover the overdrawn amount.
- Overdraft line of credit: This feature links your protected account to an established line of credit. When you overdraw, you borrow against that line of credit to cover the shortfall. You’ll likely pay a transfer fee and interest on the borrowed balance.
- Linked credit card: Some banks allow you to link your checking account to a credit card for the purpose of overdraft transfers. If you overdraw, a cash advance from a credit card automatically covers the amount. You’ll usually pay a fee for the cash advance as well as interest on the balance.
Which banks offer overdraft protection?
| Bank | Type | Fee |
|---|---|---|
| Bank of America | Linked deposit account | $0 |
| Chase | Linked deposit account | $0 |
| Citizens Bank | Linked deposit account | $0 |
| Commerce Bank | Linked credit card | 5% of the transfer amount (with a $10 minimum) plus interest at the cash advance rate |
| Fifth Third Bank | Linked deposit account | $12 per occurrence with Essential Checking, unless the overdraft is $5 or less |
| TD Bank | Linked deposit account | $0 |
| U.S. Bank | Line of credit | Variable-rate APY on money you borrow |
Note: Some banks may offer additional overdraft protection funding options than the options listed in the table above.
Pros and cons of overdraft protection
Overdraft protection can be a useful tool, although it’s important to consider its benefits and downsides before deciding if the service is right for you.
Pros of overdraft protection include:
- It can help you avoid paying overdraft fees and having transactions declined.
- Overdraft protection transfers from a linked savings account may be free of charge.
- It may enable checks to clear that otherwise would bounce and incur returned check fees from merchants.
Cons of overdraft protection include:
- There may be a fee and interest charged when transfers take place from a linked credit card or a line of credit.
- Transactions may be declined if you don’t have the funds to cover them in your linked savings account.
- It could result in overspending, especially by those who don’t realize when there are fees associated with transfers.
How to avoid overdraft fees
In recent years, many banks have eliminated or reduced overdraft fees, as banks face pressure from lawmakers and consumer advocates to curb such fees. Plenty of banks do still charge overdraft fees, however, while others don’t charge a fee but simply deny transactions that would cause a negative balance. There are various ways to help avoid being hit with overdraft fees and to keep your account balance positive:
- Pay close attention to your account balance. This can help you avoid overspending if you’re in danger of overdrawing the account. If you want to curb spending, it can help to create a budget that allows you set limits for spending in each category every month.
- Sign up for low balance alerts. Receiving a notification from your bank’s mobile app when your balance falls below a set threshold can help you avoid overdrafts.
- Use an account that offers overdraft protection transfers without fees. Some banks don’t charge a fee for overdraft protection transfers from a linked savings account.
- Tell your bank not to cover overdrafts. While this can result in rejected debit card or ATM transactions, you won’t incur any fees for overdrafts or overdraft protection transfers.
Bottom line
Overdraft protection can be a safety net for anyone who has enough in a savings account to cover an occasional overdraft, or those who will likely be able to pay off an overdraft cash advance in a timely manner. An overdraft protection transfer may also help you from having to pay significant overdraft fees.
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