If you spend more money than you have in your checking accountand end up with negative balance, your bank or credit union may cover the payment and charge you an overdraft fee.
Overdraft fees cost up to $35 and are one of the most expensive and common checking account fees, since you can incur multiple overdraft fees in one day. The limit on overdraft fees varies by bank/credit union, but many cap it at four per day.
Some banks offer overdraft protection, which can help you avoid fees each time yourbank or credit union authorizes transactions greater than your available balance.
CNBC Select explains how overdraft protection works, and we offer some tips on how to avoid overdraft fees.
What is overdraft protection?
Many banks and credit unions provide the option to enroll in overdraft protection, also known as overdraft coverage/service. When you opt into this service, the additional money you need to cover a transaction will be transferred from a linked bank account, typically a savings account, but you could also link a secondary checking account, credit card or line of credit. While you may still incur a fee for the transfer, it's often less than the overdraft fee.
For instance, the Bank of America Advantage Plus Banking® account does not charge a balance transfer fee when you enroll your eligible checking account in Balance Connect for Overdraft Protection, which saves you the the overdraft fee of $10 per item.
There are other checking accounts that don't charge savings account transfer fees after you opt-in, such as the Capital One 360 Checking® Account and the Discover® Cashback Debit Checking.
If you sign up for overdraft protection, but ultimately decide it's not the best service for your needs, you can opt out at any time.
How to avoid overdraft fees?
The simplest way to avoid overdraft fees is to maintain a positive account balance at all times. Regularly check your account balance, and if you pay certain bills (such as your credit card) by autopay, make sure you have enough to cover the cost before the bill is paid each month.
You can also consider opting-in to your checking account's overdraft protection, but do your research to see if there are fees associated with it. If your bank or credit union charges a fee for transferring money from a linked bank account, consider switching to an account that has no overdraft fees.
The Capital One 360 Checking® Account offers three overdraft settings, and two options have no fees.
- Auto-decline: Capital One generally declines transactions that are greater than the balance in your account and won't charge a fee.
- Free savings transfer: Capital One will transfer available funds from a linked savings or money market account to cover overdrafts at no additional cost.
- Next Day Grace: Capital One authorizes transactions that exceed the balance in your account, and you'll have until the end of the next business day to make your balance positive, or you'll incur a $35 fee.
For all options, bounced paper checks (which occur if you write a check and don't have enough money in your bank account to cover the amount) incur a $9 insufficient funds (NSF) fee.If you want to minimize overdraft fees, consider the auto-decline or free savings transfer options.
There are some checking accounts that don't charge any overdraft fees whatsoever, such as the Discover Cashback Debit Checking. This is one of CNBC Select'sbest no-fee checking accounts,and it doesn't charge many of the fees other checking accounts do, such as monthly maintenance fees or bounced check fees.If you make a transaction without enough money in your account, Discover will decline it unless you enroll in overdraft protection (which is free) and have enough funds in a linked account.
Overdraft protection, how it works and the related fees differ some from bank to bank, and it can be confusing. It's important to make sure you understand the terms and fees connected to your account, before you opt-in.In addition to regularly monitoring your balance and signing up for overdraft protection, set up alerts with your bank or credit union that notify you if your balance is running low. This can help you avoid overdrawing your account and potentially save you on steep overdraft fees.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
Overdraft protection is an agreement with the bank or financial institution to cover overdrafts on a checking account. This service typically involves a fee and is generally limited to a preset maximum amount.
What is a overdraft very short answer? ›
An overdraft occurs when you don't have enough money in your account to cover a transaction, but the bank pays the transaction anyway.
How does the overdraft work? ›
An overdraft lets you borrow money through your current account by taking out more money than you have in the account – in other words you go “overdrawn”.
What is overdraft protection Quizlet? ›
DEFINITION of 'Overdraft Protection' A line of credit that banks offer to their customers to cover their overdrafts.
Why does overdraft protection work? ›
Pros of Overdraft Protection, Explained
When you sign up for overdraft protection, your bank will use a linked backup source that you designate—a savings account, credit card, or line of credit—to pay for transactions whenever the checking account lacks the needed funds.
What is overdraft protection and why do banks push it? ›
Overdraft protection is a service offered by some banks and credit unions that allows customers to overdraw their checking accounts, generally for a fee. Having overdraft protection enables transactions to clear even when there aren't enough funds in your account to cover the cost.
What is overdraft in one word? ›
overdraft. / (ˈəʊvəˌdrɑːft) / noun. a draft or withdrawal of money in excess of the credit balance on a bank or building-society cheque account.
What are overdraft advantages and disadvantages? ›
Advantages of an overdraft
Overdrafts also tend to be much less expensive than other forms of borrowing, such as credit cards or payday loans. However, it is important to remember that overdrafts are a form of debt, and as such, they should be used sparingly and repaid as soon as possible.
What is an example of an overdraft? ›
A bank overdraft is as same as a bank account that can have a negative balance, up to the sanctioned overdraft limit. Example: If your bank account has Rs. 10 lakh in the bank and you withdraw Rs. 12 lakh for business purposes, an overdraft loan is a by-default loan for the extra Rs.
How does overdraft affect you? ›
Overdrafts don't usually affect your credit scores unless you don't resolve them quickly and the account goes into collections. Checking accounts aren't included in your credit reports from the three major credit bureaus, but they could be included in your ChexSystems report.
Using it for long-term borrowing or large amounts can lead to financial difficulty. There are high costs for using an overdraft. Regular overdraft use can lead to a cycle of debt if you rely on it as part of your monthly expenses. If you go over your arranged overdraft limit, we call it an unarranged overdraft.
What is overdraft protection for dummies? ›
Overdraft protection is a guarantee that a check, ATM, wire transfer, or debit card transaction will clear if the account balance falls below zero. There may be heavy fees and interest associated with overdraft protection, depending on the kind of linked account used.
How is overdraft protection bad? ›
Cons. Some banks may still charge fees for using overdraft protection. If your account is linked to a credit card, you will have to pay fees associated with cash advances, as well as any interest on the balance. If you use a line of credit, you will have to pay interest on the balance until it is paid off.
Is overdraft protection a good idea? ›
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.
Does overdraft protection let you withdraw money? ›
If you choose to opt in to debit card and ATM overdraft, you are usually allowed to make ATM withdrawals and debit card purchases even if you do not have enough funds at the time of the transaction. However, you will generally incur fees on transactions that settle against a negative balance later.
Do I get overdraft protection money back? ›
Yes, you can get overdraft fees waived at many financial institutions, but it may depend on the bank. Some banks may have a formal process for fee waivers or may provide auto-deposits from connected accounts. Here are some steps for getting overdraft fees refunded: Simply ask for a refund.
What is the downside of overdraft protection? ›
Cons. Some banks may still charge fees for using overdraft protection. If your account is linked to a credit card, you will have to pay fees associated with cash advances, as well as any interest on the balance. If you use a line of credit, you will have to pay interest on the balance until it is paid off.
