Life can get hectic at times. And it's easy to forget how much money is left in your checking account, especially if you bought things back-to-back or your paycheck isn't the amount you were expecting.
The problem is, when you don’t know how much money is in your account, you can easily overdraw it, which can cause fees or declined transactions — or both.
This is where overdraft protection can save the day. It helps prevent declined transactions and nonsufficient funds (NSF) fees. With overdraft protection, your checking account has backup from another account or payment method that can fund the transaction.
Erika Recommends
- SoFi Checking and Savings Account
Fee-free overdraft protection up to $50. - Chime® Checking
SpotMe® feature covers up to $200 in overdrafts, with no fee.*
What Is Overdraft Protection?
Most banks offer overdraft protection. When you sign up for this service, you either link your savings account, credit card, or a line of credit to your checking account.
That way, if you're out grocery shopping and don't have enough funds in your checking account, your bank can pull money from that linked account to cover your transaction.
This not only allows your transactions to go through but also avoids NSF fees, which, on average, are roughly $26 (or more) per transaction.
RELATED: Checking vs. Savings Accounts: What’s the Difference?
How Does Overdraft Protection Work?
Suppose you go to the grocery store, but you forget that you made a large credit card payment this morning and paid your rent yesterday. Now you’re not sure if you have enough money in your account to pay for your groceries.
If you don't, when you swipe your debit card at the store, one of three things can happen:
- Your transaction is declined, and you can't buy your groceries.
- The transaction is approved, but it causes a negative balance in your account. This typically triggers an overdraft fee.
- Your overdraft protection kicks in, transfers money from your linked account, and you leave with your groceries.
When you set up an overdraft protection service, you'll usually have a few options.
- Link a savings account. With this setup, the bank will pull money from your linked savings account to cover a transaction.
- Link a credit card. The bank will transfer money from your credit card into your checking account to avoid an overdraft. Be cautious if you choose this option, as you'll be charged a cash advance fee and a higher APR.
- Use a line of credit. The bank will use money from your line of credit to cover an overdraft. Just like with a credit card, be aware of any transfer fees and interest charges.
Pros and cons of overdraft protection
| Pros | Cons |
|---|---|
| Convenience: Overdraft protection can really come to the rescue in situations like being stuck at the gas pump without enough funds to fill your tank. | Fee: You still have to pay a fee. If you are using a credit card or line of credit, there may be cash advance or transfer fees, although, in some cases, it may be less than an NSF fee. |
| Save face: You can avoid an embarrassing incident when a transaction fails (like at your favorite restaurant in front of friends). | Not foolproof: If you don’t have sufficient funds in the backup account, the transaction could still fail and cause an NSF fee. |
Tips To Avoid Overdraft Fees
Not all banks charge an overdraft fee. In fact, some even give you a “loan” until your next payday. If you frequently have a negative balance in your account, you may want to consider switching banks.
For example, the SoFi Checking and Savings Account offers up to $50 in overdraft coverage for no fee (however, you must receive $1,000 or more in total monthly direct deposits to be eligible).
For more coverage with a lower balance requirement, Chime® Checking offers SpotMe® — fee-free overdrafts of up to $200 if you have at least $200 or more in monthly qualifying direct deposits.*
But of course, ideally, you should avoid overdrawing your account altogether. Some tips to keep you organized:
- Keep a close eye on your checking account balance. Always know what's in your account before you make a purchase.
- Set up low-balance alerts. Many banks can send push notifications if your account balance falls below a certain amount.
- Make payments in cash. Some people find that withdrawing cash from the bank once a month or weekly and then only using that cash to make purchases helps them stick better to a budget.
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FAQs
Is there a limit on overdraft fees?
Unfortunately, there are no federal laws that specify the maximum number of over-limit fees a bank can charge per day. It's not uncommon to receive multiple overdraft fees in one day.
When opening your account, read the terms and conditions to ensure the bank discloses its fee policy, particularly if you have concerns about overdrafts.
Will my card decline if I have overdraft protection?
Overdraft protection prevents card declines when there isn't enough money in your checking account to complete a transaction. It’s important to note, though, that if the linked overdraft protection account you use to set up overdraft protection fails to have the funds needed, the transaction may fail.
How long can you be overdrawn?
If you do overdraw your account because you don’t have overdraft protection in place, you usually have three to 31 business days to make your account balance positive before you risk facing more penalty fees or account closure.
TL;DR: Should You Get Overdraft Protection?
Overdraft protection can be a lifesaver when you're caught short on cash. But it's not free — there are limits to how much you can overdraw, and you'll owe that money once you're back in the black.
The best approach is to stay on top of your balance with alerts and budgeting tools. If you do need a safety net, consider switching to an account that offers fee-free overdraft coverage, like the SoFi Checking and Savings Account or Chime® Checking.
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* Chime is a financial technology company, not a bank. Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC.
SpotMe Debit Disclosure: SpotMe®️ on Debit is an optional, no fee overdraft service attached to your Chime Checking Account. To qualify for the SpotMe on Debit service, you must receive $200 or more in qualifying direct deposits to your Chime Checking Account each month and have activated your physical Chime Visa®️ Debit Card or secured Chime Visa®️ Credit Card. Qualifying members will be allowed to overdraw their Chime Checking Account up to $20 on debit card purchases and cash withdrawals initially but may later be eligible for a higher limit of up to $200 or more based on Chime Account history, direct deposit frequency and amount, spending activity and other risk-based factors. The SpotMe on Debit limit will be displayed within the Chime mobile app and is subject to change at any time, at Chime's sole discretion. Although Chime does not charge any overdraft fees for SpotMe on Debit, there may be out-of-network or third-party fees associated with ATM transactions and fees associated with OTC cash withdrawals. SpotMe on Debit will not cover any non-debit card transactions, including ACH transfers, Pay Anyone transfers, or Chime Checkbook transactions. SpotMe on Debit Terms and Conditions.
