Overdraft Protection: What Is It and How Does It Work?

If you’re worried about your bank account balance running low, overdraft protection may be worth considering. This optional service allows you to cover a transaction if you don’t have enough money in your checking account, such as by drawing funds from a linked account or getting the amount loaned by the bank. Overdraft protection is distinct from overdraft coverage, which can similarly allow your transaction to go through but may result in an overdraft fee.

Read on to see what overdraft protection is and how it works — as well as how it compares with overdraft coverage — so you can decide whether this service is right for you.

What is overdraft protection?

When you make a purchase that exceeds your checking account balance, your bank will either approve or decline the transaction. However, your transaction may go through if you have opted to enroll in overdraft protection. The bank covers the shortfall between the purchase amount and your available balance, often by transferring funds from a linked account.

Your bank may allow you to link the following types of accounts for overdraft protection:

• Savings account
• Money market account
• Secondary personal checking account
• Line of credit (personal, home equity)
• Credit card

The optional overdraft protection service should not be confused with standard overdraft coverage. Overdraft coverage comes with most checking accounts and involves the bank lending you the funds needed to complete a transaction, similar to a short-term loan. This usually results in an overdraft fee.

While overdraft protection can be helpful — such as in an emergency or to avoid the embarrassment of a declined transaction — some banks charge a transfer fee to use this service. If you overdraw your account, you may also owe nonsufficient funds (NSF) fees.

Overdraft protection vs. overdraft coverage

• Overdraft protection: Some banks offer this optional service, which allows you to link your checking account to another account, such as a savings account. If you overdraw your checking account, the bank will transfer funds from your linked account into your checking account. While this protection allows you to avoid an overdraft fee, you may have to pay transfer fees and NSF fees.
• Standard overdraft coverage: This service is included with most checking accounts. Your bank lends you the funds to complete a transaction if you don’t have enough money in your account. It may charge overdraft fees for each transaction you make once your account falls below zero, typically up to a daily limit.

How does overdraft protection work?

Overdraft protection kicks in when you don’t have enough money in your bank account to cover a transaction. Not all banks offer overdraft protection, and those that have the service may have specific rules and limitations. Overdraft protection can apply when you swipe your debit card, write a check, withdraw money from an ATM or make an automatic bill payment.

Note that your bank may charge a transfer fee for using this service. For example, U.S. Bank may charge a $12.50 overdraft protection transfer fee if the overdraft amount is more than $5.

Overdraft protection example

Let’s say your car needs unexpected repairs a few days before your next paycheck is due to hit your bank account. Your account balance is $800, and the car repairs are $850, meaning you are short by $50.

Here’s what could happen, depending on the type of overdraft protection or coverage you’ve chosen:

• Standard overdraft coverage: The bank will spot you the $50, and your account balance will be negative by $50 plus any applicable overdraft fees.
• Overdraft protection through a linked account: Your bank will automatically transfer $50 from your linked account, such as a savings account or line of credit, to help you avoid overdrawing your account. You might be charged transfer fees, but you may avoid any overdraft fees.

How much are overdraft fees?

While many banks charge low or no overdraft fees, that’s not always the case. Overdraft fees often run between $30 and $35 per occurrence. Having overdraft protection could help you avoid paying this particular fee, though other fees may still apply.

Here's a look at the overdraft fees that some major banks charge:

• Chase Bank: $34 per transaction
• Wells Fargo: $35
• USAA: $29
• Citizens Bank: $35

How to avoid overdraft fees

Here are a few strategies to help you avoid or minimize overdraft fees from your bank:

• Monitor your bank account: Keeping an eye on your checking account can help you spot when your balance is running low. By staying aware of how much money is available, you can avoid spending more than you have. Enrolling in account notifications to get updates on your account status in real time can be helpful. For example, some banks can send you alerts via email or text when your balance falls below a certain amount.
• Link a savings or other account: Some banks offer the option to link a savings account to your checking account for overdraft protection. If you overdraw your checking account, the bank will transfer money from the linked account into your checking account to cover the gap. Remember that while this reduces the risk of overdraft fees, the bank may still charge transfer fees.
• Turn off overdraft coverage: If you're enrolled in overdraft coverage, you can opt out at any time. This way, instead of pushing through transactions that exceed your account balance (and possibly charging you a fee), your bank will simply decline the transaction. You can usually opt out of overdraft coverage through your bank’s website or mobile app, or by calling customer service. If you want overdraft protection in case of budget shortfalls, make sure to check if any bank fees will apply.
• Review your automatic bill payments: Overdrafts can occur when multiple automatic bill payments are taken from your account around the same time. To address this, consider contacting your creditors to ask about switching your due dates. For example, if most of your bills are due at the beginning of the month, see if you can move some to the middle or end of the month. Spreading out payments can decrease the risk of overdrawing your account.
• Switch to a bank that doesn’t have overdraft fees: Many banks — including Ally Bank, Capital One and Axos Bank — don’t charge overdraft fees. Many of these banks operate primarily online, so that’s something to consider if you prefer to do your banking in person.

Which banks have overdraft protection?

Banks that provide overdraft protection and other overdraft coverage services include:

Should you sign up for overdraft protection?

Overdraft protection can fill in the gap when your bank account runs low between paychecks, allowing you to avoid overdrafts and the associated fees. However, overdrafts can lead to banking trouble down the road, as unpaid bank account balances may show up on your ChexSystems report, which tracks your banking history, including overdrafts.

Still, you may incur transfer and NSF fees with overdraft protection, so it may not be a cost-free fallback. Generally, it’s best to avoid getting into a cycle of overdrawing your account, whether by setting up account alerts or better monitoring your balance.