Life can become hectic at times. It's easier than you think to forget how much money is left in your checking account, especially if you bought things back to back or if your paycheck isn't the amount you were expecting.
The problem is, when you don’t know how much money is in your checking 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 overdraft fees. When you have overdraft protection, your checking account has some backup from another account or payment method that can fund your transaction.
With the average overdraft fee over $26, it's worth coming up with a plan to ensure you avoid this fee.
Erika Taught Me
- Overdraft protection can prevent declined transactions and overdraft fees.
- You can use savings accounts, credit cards, or lines of credit for overdraft protection.
- If the backup account charges cash advance or transfer fees, you will still be charged a fee.
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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 ever have insufficient funds in your checking account, your bank can pull money from that linked account to cover a transaction. This not only allows your transactions to go through but also avoids overdraft fees.
How Does Overdraft Protection Work?
Suppose you go out to buy groceries, but you forget that you made a large credit card payment this morning in addition to paying your rent yesterday. Now you’re not sure if you have enough available 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.
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When you set up the overdraft protection service you'll usually have a few options.
Link a savings account: Linking your savings account to your checking account is a common option to provide overdraft protection. With this set up, the bank will pull money from your linked savings account if funds are needed to cover a transaction.
Link a credit card: Be cautious if you choose to link a credit card as your overdraft protection account. The bank will transfer money from your credit card into your checking account if you need it to avoid an overdraft. This will cause your credit card to charge you a cash advance fee and the amount will be charged the higher cash advance APR.
Use a line of credit: Sometimes you'll have the option to open a line of credit with the bank to use as overdraft protection. Just like with a credit card, you'll want to be aware of any transfer fees and interest you may be charged if you use this service.
Related: Best Checking Accounts
Pros and Cons of Overdraft Protection
Before you sign up for overdraft protection, it’s important to consider both the advantages and disadvantages of doing so.
Pros
- Convenience. You can rest easy knowing you won’t be stuck after a transaction fails to go through. Overdraft protection can really come to the rescue in situations like being stuck at the gas pump without enough funds in your checking account to fill your tank.
- Save face: If you don’t want an embarrassing incident when a transaction fails (like at your favorite restaurant in front of friends), then you will likely appreciate having some backup support.
Cons
- Fee: The main disadvantage of overdraft protection is 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 overdraft fee.
- Not foolproof: If you don’t have sufficient funds to cover the transaction in the backup account, the transaction could still fail and cause an overdraft fee.
Tips To Avoid Overdraft Fees
Overdraft protection can be a nice backup, but it’s not a perfect system. Ideally, you should avoid overdrawing your account altogether.
Keep a close eye on your checking account balance. With bank mobile apps being so common these days, it’s easier than ever to keep tabs on your checking account balance.
Set up low-balance alerts. Most banks these days allow you to set up alerts on your checking account. You can get a notification on your phone if your account balance falls below a certain amount.
Switch banks to one that doesn't charge overdraft fees. Not all banks these days charge this fee. In fact, some even have features that will give you a free loan until your next payday. If you frequently have a negative balance in your account, you may want to consider switching.
You can also keep things old-fashioned and make payments in cash. Some consumers 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.
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.
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