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Using Free Overdraft Transfers to Your Advantage

Overdraft fees have garnered quite a bit of attention within the banking industry over the past several years. We stepped into that conversation recently here on the blog with a couple of posts that offered a review of overdraft and NSF fees and a deeper look into the numbers on both.

Within those two articles, we also referred to another common banking charge known as an overdraft transfer fee. We touched on the average amounts charged by banks for overdraft transfers, and we offered several examples of common fee structures. Here, however, we’d like to break a bit from the usual data research and presentation and consider a method by which the structure of OD transfer fees might actually be used to a consumer’s advantage.

The Strategy

It is no secret that savings and money market accounts carry higher interest rates on average than do standard checking accounts, and recall from the previous articles that overdraft protection transfers involve a linked savings or money market account or line of credit from which money can be withdrawn to cover an overdraft on a checking account. Shrewd consumers have discovered that free overdraft transfers may be used to their advantage by allowing them to keep more of their money in savings or money market accounts with higher APYs longer, instead of leaving large monetary cushions in lower APY standard checking accounts that they use for monthly purchase activities. In a sense, they actually plan to overdraw their checking accounts, triggering transfers from linked accounts to cover the deficit.

Shrewd consumers have discovered that free overdraft transfers may be used to their advantage.

The general idea for these consumers is quite simple. They leave only small amounts of cash–whatever they need for daily operations–in their checking accounts. The larger amount–the monetary cushion, as it were–stays in a savings account offering higher rates than the checking account. When that money is not being used elsewhere, it is earning interest at a higher rate than it would in the checking account. Then, when a large expenditure is made, a debit is made from the checking account to cover it, which triggers an overdraft protection transfer from the linked savings account. The expenditure is covered automatically. It costs the consumer nothing and allows him to earn higher interest on the money in his accounts.

No Transfer Fee Accounts by the Numbers

The strategy is simple enough, right? The only thing required is a checking account with no fee for OD transfers and a higher yield savings account that can be linked together. Within our proprietary data set, we pinpointed more than 230 checking accounts from various institutions that offer an overdraft transfer at no charge. Digging into the information about those accounts yielded some interesting results.

When we parsed the numbers on OD charges, internet banks shined, coming in with the lowest average fee amount for overdrafts and the highest percentage of banks that offer no transfer fee accounts. Accounts with no OD transfer fees are far more common among internet banks percentage-wise than credit unions and banks. When comparing the number of institutions with no OD transfer fee checking accounts to the total number of institutions for each institution type, internet banks produced a rate of 63.6% among those that published OD transfer fees, which is a far higher percentage than banks or credit unions. Here is the full breakdown by institution type:

Institutions with No Transfer Fee Account, By Type

In much of the market research we have conducted previously, internet banks have shown an advantage, followed by credit unions, with traditional banks bringing up the rear. Surprisingly, in this case, traditional banks, though still exhibiting a far smaller percentage of banks with no OD transfer fee accounts than internet banks, beat out credit unions with a rate of 16.9%. Credit unions uncharacteristically brought up the rear with only 12.6% of institutions offering no transfer fee accounts.

Research into OD transfer fees according to institution size–using our standard delineation: small (<$1B in assets), medium ($1B-25B), and large (>$25B)–also yielded results that were not in keeping with the expectations set by earlier research:

Institutions with No Transfer Fee Account, By Size

The percentage of small institutions that offer accounts with no transfer fee was unexpectedly low at just 10%. Medium-sized institutions were only slightly better at just over 18%. The most unexpected performance was that of large institutions, of which nearly half offered accounts with no OD transfer fees.

Notable Accounts with No OD Transfer Fee

With those numbers in mind, we turned our attention toward highlighting specific institutions and the accounts they offer with no OD transfer fee. In particular, we focused on institutions with the highest APY on savings accounts that could be linked to the checking accounts with no OD transfer fees. Below are a few of the best for each institution type:

CD Rates Table *Accounts have $1,000 Maximum Balance for Given APY

One of those institutions certainly stands out. Blue Federal Credit Union has a linkable savings account with an APY of 4.99%, though it carries the restrictive caveat of only being available on balances up to $1,000. Apart from that outlier, a respectable one percent rate can be found in a couple of institutions, Ally Bank and Safe Credit Union, though Safe also carries a maximum balance of $1,000. Several others with decent savings rates are also available, with the best options originating from internet banks and credit unions. This is a small sampling of the available accounts with no OD transfer fee, but these do have the best chance for higher returns because of the savings account APYs. Choosing the right institution and accounts and employing this strategy must be done with care, however. Otherwise, an unseen pitfall may catch an unwitting consumer off guard.


One such pitfall lies in the number of withdrawals an account holder can make from a savings account in a given time period. A federal regulation limits certain types of withdrawals from savings accounts to six per month, including "preauthorized or automatic transfer, or telephonic (including data transmission) agreement, order or instruction, or by check, draft, debit card, or similar order made by the depositor and payable to third parties." The "automatic transfer" language in that statement includes automatic OD transfers; therefore, utilization of this interest-enhancing strategy must include less than six transfers per month.

A second pitfall in securing the right account lies in the linked account from which the transfer is taken. Some of the institutions that offer accounts with no OD transfer fee may offer different types of accounts from which to draw for overdraft protection. Not all of them are useful for this strategy. For instance, Capital One 360 offers a fee-free checking account with the option of covering overdrafts through a linked savings account or a line of credit. Of course, the option of covering through a line of credit would both negate the plan for saving and cost the account holder interest. Therefore, consumers need to be sure to choose a checking account that can be linked to a savings account (and one with a high interest rate, at that) for the express purpose of overdraft protection. Otherwise, the strategy will not work.

The Bottom Line

This is the third article in a series concerning overdraft fees, and this one marks its conclusion. Their purpose has been to both take a look at market research and pinpoint methods for minimizing loss through fees and maximize gains through a helpful strategy. As with every banking choice a consumer makes, it all comes down to the particular habits and personal needs he or she may have, as numerous variables – from fees to accessibility to APY – are involved in choosing an institution and a particular account. So, as we’ve said before, research well and employ the numerous tools found here on our site. Gathering as much information as possible concerning even the most minute details, such as overdraft transfer fees, can serve your needs and ultimately increase your bottom line over time.

This post is from our analyst, Rodney, and is part of an ongoing series of articles that seek to take a deeper and more concerted look into what we can glean from our proprietary database of depository rate and product data.

Previous Comments
  |     |   Comment #1
I loved free overdraft protection until thieves skimmed most every free ATM near me; eventually my losses were reinstated, but not before losing access to checking AND savings at my primary bank for over a week. Never again! I turned off all overdraft coverage and keep limited amounts in my checking account. I also stick to getting cash at a bank, not some dark corner of a slushie vendor.
  |     |   Comment #2
> This is the third article in a series concerning overdraft fees, and this one marks its conclusion.
I very much appreciate the thoroughness and clarity provided. THANK YOU Rodney C.!
  |     |   Comment #3
Commercial customers have had a zero balance in their checking for many years. Transfers are made for debits to their account at the end of the day to cover those debits. The main account is invested in the product that the company picks. Only the little customer keeps money in their checking without getting compensated unless they read Ken's blog and know about reward checking accounts. Thanks Ken for all your suggestions and help and great articles written by you and your guests.
  |     |   Comment #4
I go for convenience these days.  With the pitiful rates the banks and even credit unions give on checking accounts in my area, one can't make enough to warrant being concerned about keeping a bit more in the checking.  I had to laugh recently when I saw my generous bank paid me a "nickle" in interest!!  My checking accounts are my convenience accounts so I don't worry about the "nickle" or the rules involved in having those "reward" accounts. 
  |     |   Comment #5
I use Ally Demand notes as my checking account because it pays 1.16% APY and unlike a traditional MMA it has no limit on withdrawals or transactions in a given month. I still have a regular checking account that I keep a bare minimum of cash in for direct deposit. This way I'm guaranteed to be earning the highest yield possible on my liquid cash while not having to jump through and rewards checking hoops or linked savings accounts and paying $0 fees. The only thing is I now have to maintain a $50,000 balance to earn that high yield.........it used to be only $1,000.
  |     |   Comment #6
Ally use to be GMAC and its demand notes did not have FDIC protection...does Ally?
  |     |   Comment #7
Ally bank is highlighted in above article but I don't think it will work for larger amounts, because Ally site claims to withdraw in $100 increments, so really, you can do up to $600/month with no other withdrawals from saving account before reaching max monthly number of withdrawals, or am I missing something?
  |     |   Comment #8
What they mean by $100 increments is that if you overdraft by say $863 in one transaction, it will transfer $900 to checking in as a **single** transaction.

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