What Is Overdraft Protection?

Overdraft protection is an optional service that prevents charges to a bank account (primarily checks, ATM transactions, and debit-card charges) from being rejected when they exceed the available funds in the account. Overdraft protection, sometimes called cash-reserve checking, is used most frequently as a cushion for 澳洲幸运5官方开奖结果体彩网:checking accounts but can also be applied to savings accounts.

With overdraft protection, even if the account has insufficient funds, the bank will cover the shortfall so that the transaction goes through. When customers sign up for 澳洲幸运5官方开奖结果体彩网:overdraft protection, they designate a backup account for the bank to use as the source to cover any overdrafts—usually a linked savings account, credit card, or line of credit. However, the bank charges the customer for this service in a few ways, such as 澳洲幸运5官方开奖结果体彩网:overdraft fees to process transactions that♋ overdraw the account𒈔.

How Overdraft Protection Works

Without overdraft protection, transactions with insufficient funds to cover them are returned unpaid. In other words, checks bounce, and debit transactions get rejected, which can be expensive and disruptive for 🌳the customer.

On average, many banks charge overdraft and 澳洲幸运5官方开奖结果体彩网:non-sufficient funds (NSF) fees between $30 and $35 per transaction. However, several larger banks have reduced or eliminated the NSF fee for accounts with insufficient funds.

Moreover, not only ♓can the bank refuse payment ꦐand charge the account holder, but the merchant may also charge a penalty or fee for the failed transaction.

To avoid overdraft and NSF fees, 澳洲幸运5官方开🍨奖结果体彩网:customers who choose overdraft protection link their 澳洲幸运5官方开奖结果体彩网:checking accounts to credit cards, savings accounts, or other lines of credit that kick in whenever they withdraw more than the current balance. This amounts to an automatic, pre-approved loan or transfer every time the customer with insufficient funds writes a check, makes a wire transfer, swipes a debit card, or withdraws from an ATM for an amount that exceeds the 澳洲幸运5官方开奖结果体彩网:checking account balance.

As soon as the overdraft protection service is triggered, the linked account is charged a transfer fee to move funds to cover the shortfall. The account holder may also be charged an additional fee every month that overdraft protection is used or a fixed monthly fee for continuous protection.

Example of Overdraft Protection

If a renter wit💖h overdraft protection writes an $800 check on an account with a balance of $650, the overdraft protection from their linked account kicks in as soon as the check is cashed—and the check clears instead of bouncing due to insuꦡfficient funds.

The bank may charge a transfer fee of $15 for approving a transaction that exceeds available funds. The renter will now have a balance of $635 ($650 - $15) in the account, as well as a charge of $800 to pay off on the linked credit card, line of credit, or 澳洲幸运5官方开奖结果体彩网:savings account.

Special Considerations

Lines of credit for overdraft protection can range from $500 to $7,500 and above—and, of course, customers incur interest charges and transaction fees for using these lines.

If an account holder uses a 澳洲幸运5官方开奖结果体彩网:credit card as overdraft protection, the amount covered by the card gets treated as a 澳洲幸运5官方开奖结果体彩网:cash advance—which can be costly.

澳洲幸运5官方开奖结果体彩网:Credit cards typically charge a cash-advance fee, such as a $10 flat fee or 5% of the advance, whichever is greater. Credit cards also charge a high interest rate on the balance, and cash advances have no grace period, meaning interest accrues immediately.

A linked 澳洲幸运5官方开奖结果体彩网:savings account is probably the least expensive form of overdraft protection, but you must have enough money in the savings to covꦡer the shortfall in the first account.

Trends in Overdraft Protection

Overdraft fees have always been among the most controversial bank fees. According to a 2024 Bankrate.com survey of 10 banks and thrifts in each of 25 large U.S. markets, the average overdraft increased to $27.08, from $26.61 in 2023.

In the wake of the 2020 pandemic, public debate accelerated a trend toward 澳洲幸运5官方开奖结果体彩网:eliminating overdraft fees. For example, the U.S. Senate held hearings on how and why banks charge fees for insufficient funds and criticized bank chief executives for refusing to halt overdraft fees during the pandemic.

More evidence of this trend includes a 2022 American Banker report that—as big banks made headlines for reducing or eliminating overdraft fees—even credit unions felt pressure from regulators and digital bank competitors to do the same.

The Bottom Line

Overdraft protection is an optional service that prevents transactions from getting rejected or bounced if the linked account—usually a checking—has insufficient funds. In other words, the overdraft protection deposits money into the checking to cover the shortfall, allowing charges to go through, such as checks, ATM transactions, and 澳洲幸运5官方开奖结果体彩网:debit-card charges.

Overdraft protection—or cash-reserve checking—acts as a financial cushion fo🧜r checking and savings accounts.

When customers sign up for overdraft protection, they designate a backup account for the bank to use as the source to cover overdrafts—usually a linked sꦆavings account, credit card, or line of credit. However, the bank may charge the customer for the service and overdraft fees to process the overdrawn transactions.