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 works by linking another deposit account, a line of credit or a credit card to your checking account. Then, whenever you withdraw more money than you have in your checking account, funds are automatically transferred from the linked account to your checking account so the transaction will clear.
What happens if you use overdraft protection? ›
Overdraft protection is a service provided by your bank that ensures your transactions are covered if you have insufficient funds in your checking account. The bank will automatically move funds you have available in another linked account to the overdrawn account.
How does an overdraft get paid back? ›
The bank or credit union will set a time limit for the overdraft to be fully repaid. The overdraft is paid back to the bank when money is put into your account. If you do not repay the overdraft in the agreed time, it can affect your credit history and make it harder to get loans or overdrafts in future.
How do you explain overdraft protection? ›
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.
How much will the US bank let you overdraft? ›
If your Available Balance at the end of the business day is overdrawn by $50.00 or less, an Overdraft Paid Fee will not be charged. U.S. Bank limits the number of charges to a daily maximum of three (3) Overdraft Paid Fees per day, no matter how many items we pay on your behalf.
Is it good to accept overdraft protection? ›
Overdraft protection can help you avoid declined transactions, late payment charges and non-sufficient funds (NSF) fees. Each NSF fee can be around $50. Overdraft protection can be less expensive than some short-term credit options, like payday loans.
What is the downside of overdraft protection? ›
Cons. Multiple transfers can result in multiple overdraft fees: If your checking account processes more than one overdraft protection transfer a day, your bank might charge a fee for each individual transfer.
Is an overdraft a good idea? ›
An arranged overdraft could be useful as a short-term safety net, helping you to manage unexpected costs, or simply tide you over for a few days. Some banks and building societies will allow you to use an unarranged overdraft, however your credit score could be negatively impacted if you do.
What is the overdraft limit? ›
Overdraft limit is the money value or credit limit sanctioned by the Bank which can be withdrawn additional to the bank balance. Moreover, the bank also charges extra fees, if a customer exceeds his/her overdraft limit, or for bounced payments.
What bank has the highest overdraft limit? ›
Synovus Bank: Overdraft limit up to $1,000
New checking accounts receive standard overdraft coverage after they've been open for 31 days and as long as they remain in good standing. Overdraft limits of up to $1,000 are available based on account type.
Your bank might offer you an overdraft line of credit that you can draw against. Say you have a checking account and the bank grants you a $1,000 overdraft limit. That means you can spend all the money in your account, plus up to $1,000 more before the bank will block any further transactions.
What happens if I don't use my overdraft? ›
If you don't use your overdraft it will show a zero balance. Anyone who is in their overdraft will see the amount they owe on their credit report. If you only dip into your overdraft occasionally and it gets cleared at the end of the month when you get paid, your overdraft use may not appear on your credit report.
Why do banks want you to get overdraft protection? ›
Overdraft protection usually covers checks, ATM, and debit card transactions. Overdraft protection may be a way to avoid the payment recipient from knowing your low bank balance, and it ensures that emergency transactions process.
How long does it take for overdraft protection to kick in? ›
Setting up Overdraft Protection
Your credit card must be confirmed; if not confirmed, no money will advance to cover the overdraft. Once your credit card has been confirmed, please allow up to 3 business days for your Overdraft Protection service to be fully enabled.
Can you withdraw money from an ATM with overdraft protection? ›
Help Avoid Overdrafts with Overdraft Protection
Overdraft Protection covers all transaction types – including, for example, ATM and debit card transactions, checks, Bill Pay, and recurring electronic payments.
What happens if your bank account goes negative and you never pay it? ›
Overdrafting your bank account and not paying what you owe could result in some negative consequences, like racking up even more fees, having your account closed, the debt going to collections, and difficulty opening a new bank account.
Can you go to jail for overdrafting? ›
Having an overdrawn bank isn't considered a criminal offense, so you won't go to jail.
Is it bad to keep using overdraft? ›
However, your overdraft does affect your credit score if you aren't careful with it. If you regularly go beyond your overdraft limit it will damage your credit rating. That's because it shows lenders you may be struggling financially.
Does using overdraft protection hurt credit? ›
Since your bank accounts do not include borrowing from and repaying a lender, they are not part of your credit report, even if you incur an overdraft fee. However, if you use the bank's money for overdraft protection, you must pay back the amount the bank covers, the overdraft fees, and any interest charges incurred.
Will my card decline if I have overdraft protection? ›
This means that your debit or ATM card may be declined if you don't have enough money in your account to cover a purchase or ATM withdrawal at the time you attempt a transaction. However, it also means you won't be charged an overdraft fee for these transactions.
