What is overdraft protection?

When checking out bank account features and benefits, you might be wondering if overdraft protection is something you need. 

While this optional service can help you avoid pricey overdraft fees, there are some strings attached. Whether you’re opening your first bank account or switching banks, here’s what you need to know about overdraft protection. 

What is overdraft protection?

Overdraft protection is a service banks offer to checking account customers as a way to minimize banking fees. When you enroll in overdraft protection, the bank agrees to cover transactions that might put your account balance in the negative. This includes:

  • Debit card purchases
  • ATM withdrawals
  • Wire transfers
  • Checks

If you’ve opted into overdraft protection, the bank will move money from a linked savings account automatically to make up any shortfall that a transaction might trigger. You might also be able to use a line of credit or even a credit card as overdraft protection if your bank allows it. 

Ordinarily, if you make a transaction and don’t have enough money in your account to cover it, the bank does one of two things: either pays for it or refuses it. When the bank pays the transaction for you, it can charge an overdraft fee for that service. Overdraft fees typically run around $35 per transaction. If the bank decides to refuse the transaction, it can charge a returned item fee instead. This fee is usually around the same amount as an overdraft fee. 

When you enroll in overdraft protection, you don’t pay those fees. Instead, you pay an overdraft protection fee.

What is an overdraft protection fee? 

An overdraft protection fee is a fee you pay to the bank for the convenience of having money shuffled around – so that you avoid the standard overdraft or returned item fees. For example, the bank might charge you $10 or $12.50 to transfer cash from savings to checkings in order to cover a charge. Every bank is different when it comes to overdraft limits and how much you can overdraft. 

One thing to note: banks charge this fee per transfer. So, if you need multiple transfers from savings to cover different transactions, overdraft protection fees can easily add up. 

What’s good about overdraft protection

There are a few good reasons to consider opting into overdraft protection. 

For starters, an overdraft protection fee is usually less than your typical overdraft fee. You can also avoid extended overdraft fees, which are charges a bank can tack on if your account balance lingers in the red for multiple days in a row. 

Opting into overdraft protection can also help you avoid embarrassing spending situations. For example, say you’re out to dinner with friends and offer to pick up the tab. If you didn’t have enough money in your checking account to cover the bill, overdraft protection would allow the transaction to go through. This way you’re not scrambling to come up with a different way to pay. 

Overdraft protection can also help you out when it comes to staying in your creditors’ or billers’ good graces and keeping your credit score on track. A bounced rent check, for example, might cause your landlord to think twice about renewing your lease when it expires. And, if you write a check for a student loan payment that gets returned for insufficient funds, your lender might report this as a late or missed payment on your credit. This can ding your credit score. 

Enrolling in overdraft protection can help you sidestep these situations. One potential drawback to consider is the amount you might pay to use a line of credit or credit card for overdraft protection. In these scenarios, you’d have to pay back the money that was transferred over to checking with interest, making this an expensive option.  

What happens if you don’t have overdraft protection? 

It’s possible that you could have no overdraft protection if you specifically opt-out of the program your bank offers. If you decide to opt-out and don’t have sufficient funds to cover a transaction, the bank can block the charge from going through on your account. This includes ATM withdrawals and debit card purchases. 

This means you won’t be charged overdraft fees for those transactions because they won’t be allowed to go through. But this can also put you in a tight spot if you need to get cash or pay for something since your card would effectively be locked down. 

On the other hand, these transactions would go through if you have enough money in your account at the point of sale or the time of withdrawal. Here’s the catch: if you don’t have enough to cover the charges once they clear from your account, you can still get charged overdraft fees. 

A compromise would be to use SpotMe. With SpotMe, you can overdraft up to $100 in debit card transactions without worrying about an overdraft fee. This can be a helpful tool if you run into a temporary cash crunch. 

Alternatives to traditional overdraft protection

Aside from opting into overdraft protection, there’s another solution for getting around pricey overdraft fees. You could make the switch to a bank that doesn’t charge fees. Chime Bank, for example, charges no overdraft fees at all. And, it’s easier than you might think to move your checking account from one bank to another. 

A second possibility is taking advantage of tools like alerts or notifications that your bank offers. For instance, you could set up low balance alerts or new transaction alerts, both of which can help you keep tabs on your balance. Knowing how much cash you have can lower the odds of ending up in overdraft. 

You can also avoid overdrafts by making sure your paychecks get to your account as quickly as possible. With Chime’s direct deposit feature, you can get paid up to two days early

Fewer bank fees means you save more money

Overdraft and other bank fees can be a real pain in the wallet. 

The easiest way to hold onto more of your money may be right in front of you: switch to a low-fee or no-fee bank. If you’re in the market for a new checking or savings account, check out Chime for fee-free debit card overdraft protection up to $100. 

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