What is overdraft protection?

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What is overdraft protection

Picture this: you’re at the register after a long afternoon spent grocery shopping. There’s a huge line of people behind you. You swipe your card, ready to pack up and go home, and… Nothing! The terminal declines your card due to insufficient funds. 

There’s nothing more embarrassing or frustrating than trying to use your card only for it to be declined at the register. Fortunately, some banks offer something called overdraft protection, which is an alternative to this unfortunate experience. 

But what is overdraft protection? And is it a good idea? Let’s find out!  

How does overdraft protection work?

Overdraft protection is a bank account feature that prevents your account from dropping below zero. Transactions that can overdraft your account include withdrawals, checks, debit payments, ACH transfers, and wire transfers. 

Some banks charge a fee or interest for overdraft protection privileges. But others may give you a short period to repay your debt without penalty. Your exact fees will vary depending on your overdraft protection plan and the type of account you use.  

Types of overdraft protection offered by banks

Different banks offer various kinds of overdraft protection plans. Let’s look at some of the most common options here. 

Linking Two Accounts

One way to protect against overdrafts is to link your checking account to another account, like your savings account or your credit card. That way, when your account overdraws, your bank will use your linked backup account to pay for transactions. 

Others may require you to do an OD protection transfer yourself, but some banks don’t charge fees if you bring your account into the black within 24 hours of the overdraft. However, this may depend on the transaction type, linked account, or how long your account stays overdrawn.  

Line of Credit Accounts

Many banks offer a line of credit as an overdraft protection option. Essentially, this is a loan from the bank that attaches to your bank account. 

When you overdraft your account, the extra comes out of your line of credit. Then, the bank charges interest on your new debt. 

Overdraft lines of credit are generally cheaper than the average per-transaction NSF fee of $34. That said, the bank may still charge a transfer or annual fee. 

Additionally, because it’s technically a loan, you may have to submit to a hard credit check to qualify. Plus, just like credit cards, it’s crucial to use your line of credit wisely to avoid ending up in debt.  

Standard Protection Opt-In

The standard protection opt-in is what most people think of when they hear about overdraft protection. Essentially, this is when your financial institution covers a transaction so you’re not denied at the register for insufficient funds. 

But unless your bank limits your standard protection opt-in, you can potentially overdraft several times a day. For banks that charge per-transaction overdraft fees, that means you risk over $100 in fees for just three transactions.  

Overdraft protection fees vs NSF fees

Technically, NSF fees and overdraft protection fees aren’t the same. Most people opt for overdraft protection believing that it will prevent them from racking up fees. And while charging a fee to prevent a fee seems counterproductive, it still happens.  

Overdraft protection fees

Overdraft fees occur when your bank lets a transaction through even if you don’t have enough money in your account. Then, the bank slaps you with a fee for overdrawing your funds. According to CNBC, overdraft charges averaged almost $34 per transaction in 2021.  

What are NSF fees?

NSF fees, or non-sufficient fund fees, occur when a merchant requests payment and the transaction is declined because you don’t have enough money in your account. 

According to the Consumer Financial Protection Bureau, the average NSF fee also runs $34 per transaction. That translated to nearly $15.5 billion in revenue for banks in 2019 alone. While the CFPB reports that several large banks are ending such fees, many banks still continue to charge them.  

Can I get an overdraft fee refund?

Some banks will issue an overdraft fee refund, especially if it’s an honest mistake or your first overdraft. In order to get a refund, you’ll have to call or visit your bank and explain your situation.  

Can you withdraw money from an overdraft account?

Some banks still let you withdraw money or run ACH payments even if your account is in the negative. But if you don’t have an overdraft line of credit set up, you’ll risk racking up a new fee for every transaction.  

Do I need overdraft protection?

Overdraft protection can be useful if you’d rather avoid NSF fees, bounced checks, or the embarrassment of declined transactions. And if you can use a line of credit option, you may not have to pay much or anything as long as you repay your account quickly. 

However, having overdraft protection can increase the temptation to spend money you know you don’t have. Plus, you may still have to pay fees and interest on overdrafted transactions, depending on your protection plan.  

Overdraft protection: your savior or your bane

Using OD protection transfers or lines of credit can save you from charging hundreds in unnecessary fees to your account every year. But if you don’t use it wisely, you’ll still put yourself at risk of going into debt and spending beyond your means.

FAQ

What does overdraft protection do?

Overdraft protection keeps your transactions from being declined due to insufficient funds. Depending on the type of protection you have, you may pay fees for the service.

How much can you overdraft with overdraft protection?

That depends on your bank. Some banks offer credit lines with limits in the thousands. Others only let you charge 2-3 overdrafts per day.

Can I transfer money from my overdraft to another account?

Many banks do permit OD protection transfers between accounts. You’ll have to talk to your bank to see if you can set up linked account protections.

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