What Is Bank Overdraft Protection?

What is bank overdraft protection? Find out here and decide if you should opt in today.

If you’ve ever made a bank miscalculation resulting in an unexpected shortage of funds, you’ve experienced a bank overdraft — and you might need overdraft protection. When you have bank overdraft protection, the bank will automatically transfer money from your linked account or credit card to pay for the transaction.

Bank overdraft protection is a service banks offer designed to cover any transactions that exceed your checking account balance. That protection can save you a lot of hassle and embarrassment due to a returned check or rejected ATM or debit card transaction.

If you don’t have overdraft protection, it might be time to get it. Learn more about overdraft protection and why it could be the answer to avoiding overdraft fees.

Related: Choose the Right Bank Account for You

Why You Should Opt In to Bank Overdraft Protection

If you make a transaction that must go through on time — like your mortgage payment or electric bill — overdraft protection could save you from penalties if you don’t have enough funds in your account. Additionally, if you opt in to an overdraft protection program, you’ll pay about half what your bank would charge you for nonsufficient funds without the protection as long as you’ve linked a savings account to your checking account.

It’s best to not overdraft, but accidents happen — the good news is that there’s a solution. If you tend to come up short rather often, you can significantly reduce fees with bank overdraft protection.

How Bank Overdraft Protection Might Backfire

Bank overdraft protection can be costly. For example, you go to Starbucks and use your debit card to buy a coffee for $3 but you have only $2 in your account. The bank will put the NSF transaction through and assess a typical overdraft fee of $30.

Next, you have a $20 dinner later and use your debit card to pay for it. You’ll overdraft a second time and you’ll pay another $30 fee. When all is said and done, you’ll have paid $60 to make $23 worth of purchases.

If you rack up multiple overdraft fees and ends up with a negative bank account balance, you might lose your account. Once the bank closes your account and reports it to ChexSystems, it will be more difficult to open one at another financial institution.

Bank Overdraft Fees

Bank overdraft fees vary widely among financial institutions. For example, Citibank charges a low fee of $10 per transaction, TD Bank charges $35, Chase Bank $0, Wells Fargo $35 and U.S. Bank $12.50. It pays to shop around for the best bank for you if you’re interested in this type of protection and think you’ll use it often.

How to Set up Overdraft Protection

If you decide to sign up for bank overdraft protection and know which account you plan to link to your checking, it’s easy to do. Most financial institutions allow you to do it online by logging into online or mobile banking and simply clicking on an “overdraft protection” link. If that’s not possible, talk to a customer service representative or visit your nearest branch to set up overdraft protection.  

Keep Reading: 12 Banking Fees You Should Never Pay

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