What Is Overdraft Protection and Do You Need It? – CNET [CNET]

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David McMillin writes about credit cards, mortgages, banking, taxes and travel. Based in Chicago, he writes with one objective in mind: Help readers figure out how to save more and stress less. He is also a musician, which means he has spent a lot of time worrying about money. He applies the lessons he’s learned from that financial balancing act to offer practical advice for personal spending decisions.

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Toni Husbands is a staff writer with CNET Money who enjoys exploring topics that promote financial wellness. She began writing about personal finance to document her experience paying off $107,000 of debt, which is detailed in her book, The Great Debt Dump. Previously, she contributed as a freelance writer for websites, including CreditCards.com, Centsai and Wisebread. She was also a regular contributor to Business AM TV, and her work has been featured on Yahoo News. Being a part-time real estate investor and amateur gardener also brings her joy.

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Liliana Hall is an editor for CNET Money covering banking, credit cards and mortgages. Previously, she wrote about personal credit for Bankrate and CreditCards.com. She is passionate about providing accessible content to enhance financial literacy. She graduated from the University of Texas at Austin with a bachelor’s degree in journalism, and has worked in the newsrooms of KUT and the Austin Chronicle. When not working, she is probably paddle boarding, hopping on a flight or reading for her book club.

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Updated Dec. 03, 2023

4 min read

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Although it can feel like a chore keeping up with your checking account balance, managing your cash flow can help you avoid high-cost overdraft fees. Spending more money than what’s in your account can be a negative hit to your credit score in addition to being expensive. 

Overdraft protection is a feature that provides an extra layer of protection, but it isn’t free. If you struggle to track the amount of cash in your checking account, it might be worth looking into overdraft protection options. 

What is overdraft protection? 

Overdraft protection is an optional service offered by most banks and credit unions to ensure your transactions go through when you have insufficient funds in your checking account. Rather than having your bank or credit union cover the cost of the purchase — which will incur a hefty overdraft fee — overdraft protection is designed to automatically transfer funds from a linked savings account or a line of credit. While you may also be able to link your checking account to a credit card, make sure this service isn’t treated as a cash advance. Cash advances on credit cards typically have fees and steep annual percentage rates.

You’ll need to authorize overdraft protection before your bank will cover a transaction on an overdrawn account. If you don’t enable it and your account lacks sufficient funds, your bank may decline the charge.

How does overdraft protection work?

To set up overdraft protection, link a savings account or a money market account — typically at the same bank — to your checking account. In some cases, you can use a line of credit, too. 

If you don’t sign up for overdraft protection, transactions that have insufficient funds will be declined. For example, if your utility bill is on autopay and your payment bounces, you’ll incur a late fee from your utility company on top of an insufficient-funds fee from your bank.

With overdraft protection, your bank automatically transfers the difference from your linked account. Keep in mind that some institutions will round up the transfer amount. For example, Citi’s Safety Check transfers enough funds to cover the transaction, but transfers are rounded up to the next $100.  

How much does overdraft protection cost?

Many banks have decreased their overdraft fees or eliminated them altogether, but they typically range from $10 to $40 per transaction, depending on the bank. 

The cost of overdraft protection coverage varies, but more banks are beginning to offer the service for free. Chase and Wells Fargo, for example, do not charge any money for overdraft protection — which is much better than paying either bank’s standard overdraft fees of $34 and $35, respectively. Contact your bank or credit union to ask about any associated fees if you want overdraft protection services. 

Pros and cons of overdraft protection

If you’re thinking about signing up for overdraft protection, be sure to weigh the advantages and drawbacks first.

Are banks required to offer overdraft protection?

Banks and credit unions are not required to offer overdraft protection. Even if they do, they get to decide how it works and whether they charge a fee for the service. Review your deposit agreement and account disclosures to learn how overdraft protection works at your bank and what it might cost you if you sign up. 

How to prevent overdraft fees

Overdraft protection isn’t your only option for avoiding overdraft fees and fees for insufficient funds. There are plenty of other ways to manage your money:

1. Opt out of overdraft coverage: Banks and credit unions can’t automatically charge overdraft fees without your consent. If you don’t want your bank to cover transactions when you don’t have enough money in your checking account, say no. 

2. Monitor your account balance: Keep a close eye on how much money is in your checking account. With the ease of mobile apps and online banking tools, you can regularly log in to see what transactions have cleared and whether you need to transfer more money into the account.

3. Set up low-balance alerts: Most banks and credit unions allow you to set up notifications on your account when your balance dips below a certain threshold. For example, you can sign up for an alert if your checking account has less than $100.

4. Avoid autopay for unpredictable bills: While autopay is a convenient feature that can help you never miss a deadline, it’s not always the best route for variable expenses. For example, if your gas bill looks different every month, it might be better to set a reminder to manually pay it in your calendar.

Should you opt in for overdraft protection?

You should consider overdraft protection if you have a history of overdrawing your accounts or your bank doesn’t offer low-balance notifications. Read the terms and conditions to understand how the service works and how much you have to pay for it. In addition, if you don’t have a linked savings account at the same bank as your checking account, think twice about whether you want to open another account there.

Editors’ note: An earlier version of this article was assisted by an AI engine. This version has been substantially updated by a staff writer.