Understand your account and what happens if you overdraw.
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Weâve all been there. You try to buy a cartload of groceries or pay a bill, and you get an insufficient funds notice. What happened ⊠and what now? Will your groceries go back to the shelf? Will this affect your credit score? Are you going to get slammed with fees and penalties?
It depends. Do you have overdraft protection?
If so, you might avoid some embarrassment, but itâs probably going to cost you, one way or another.
Key Points
- Overdraft protection allows you to make purchases even if you donât have enough money in your bank account.
- Overdraft arrangements vary, but many involve a flat fee for each overdrawn transaction.
- âOpt-inâ overdraft protection refers to debit cards; you must agree to the program and pay a fee to be protected.
What is overdraft protection?
Overdraft protection is all about making sure your transactions go throughâeven if you donât have enough money in your checking account. Your bank or credit union fronts you the money and expects you to pay it back, plus a fee, depending on the type of protection you have.
There are two main types of overdraft protection:
- Automatic overdraft checking protection. A bank or credit union can decide to let a check or transfer go through even if you overdraw your account. Your permission isnât needed for this process, but you can still be charged a fee.
- âOpt-inâ overdraft checking protection. When you use a debit card or get money from an ATM, the financial institution needs your permission to charge a fee. If you choose overdraft protection, youâre charged a fee if the bank or credit union approves a purchase. However, if you didnât opt in and the debit transaction goes through, the financial institution canât charge you a fee.
When opening a checking account, read the paperwork carefully to determine if you have overdraft protection and decide whether you want opt-in overdraft protection.
If you donât opt in for protection on debit card and ATM transactions, you can avoid fees, but you also run the risk of having your purchase declined at the register if you have insufficient funds.
How does overdraft protection work?
Overdraft protection programs are basically short-term loans from your bank or credit union. If you donât have enough money in your account, the financial institution might approve a transaction anyway. But now you have a negative balance and owe the bank or credit union money. On top of that, youâll be charged a flat fee for each transaction that goes through when you donât have adequate funds.
The next time a deposit comes into your account, the bank can automatically take some of the money to cover your checking overdraft and incurred fees.
Overdraft fees are charged for each transaction, so itâs possible to have multiple fees in a day.
Overdraft fee costs: An example
Although a federal cap on overdraft fees was set to go into effect in 2025, it was overturned before its effective date. Each financial institution continues to set its own overdraft fee structure. Itâs relatively common to see fees of $30 or $35 per transaction.
Hereâs an example:
- Suppose you have $100 in your checking account.
- At the grocery store, your total comes to $115. You have opted into your bankâs overdraft program, so the debit transaction goes through, resulting in a balance of -$15.
- On the same day, your $75 electrical bill is automatically taken from your checking account. Combined with your grocery overdraft, you now owe your bank $90.
- The bank charges $30 for overdrafts, so at the end of the day, your two overdrawn transactions result in fees totaling $60.
- Now, including the overdrafts and fees, your checking account balance is -$150.
- Letâs say your next paycheck direct deposit is $1,200. Your bank takes $150 to cover your insufficient funds plus fees, so your available balance is $1,050.
Letâs put this into perspective: You essentially paid $60 to borrow $90 for a few days. Thatâs an effective interest cost that would make predatory lenders blush. You can see how overdraft fees can add up and become a major headwind as you steer toward your goals.
Interest can quickly turn a credit card balance into costly debt.
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Banks with no overdraft fees
Not every bank charges overdraft fees. Some banks donât offer overdraft protection at all. If you donât have the money, the transaction wonât go through. Youâll save on fees, but if that denied transaction was supposed to cover a debtâyour mortgage or car payment, for exampleâyou could impair your credit score. Not good.
Other banks may not charge a fee as long as your overrun is less than a certain amount, such as $20 or $50. Be sure to read your account documents to find out your bank works and whether youâre eligible to avoid overdraft fees.
Other ways to avoid overdraft fees
Another way to avoid overdraft fees is to connect a savings account or line of credit to your checking account. This allows money to be moved into your checking account automatically when itâs needed.
- Savings account. As long as you have enough money in your savings account, the financial institution will automatically transfer money from your savings to your checking to avoid an overdraft. There might be a fee for this service, but itâs generally less than an overdraft fee.
- Line of credit. If you qualify, you can establish a line of credit with your bank and connect it to your checking account. When you overdraw your checking account, money is automatically transferred based on your available credit. You pay interest on the amount borrowed, and there might be a fee. But if you repay the debt quickly, the fee plus interest will likely be less than an overdraft fee.
You normally have to sign an agreement for these services and agree to associated fees.
Does a checking overdraft affect your credit score?
Generally, an overdraft wonât affect your main credit score. Itâs not technically considered a debt, even though you owe the bank money. However, if you donât pay the overrun back within a certain amount of time, the financial institution can send the delinquent amount to collections. Once your overdraft amount plus fees goes to collections, it shows up in your credit history and impacts your credit score.
Even if repeated overdrafts donât affect your credit score, there could still be implications. Some banks report to special consumer credit reporting bureaus that collect information about how you manage your bank and credit union accounts.
If youâre flagged in ChexSystems or Early Warning Services for repeated overdrafts, you might end up unable to open a checking account at a new institution. You might need to look into a second-chance checking account to get back on your feet.
And once again: If your bank doesnât cover an overdraft, and a payment headed to your mortgage servicer or auto lender gets denied, your credit score could be affected.
Overdraft protection can save you embarrassment at the checkout counter and make sure the bills get paid. However, even if you have overdraft protection, the bank can still deny transactions if you donât have enough funds and youâre starting to run a negative balance regularly.
Carefully review your financial habits and situation before agreeing to overdraft protection. Consider making and sticking to a budget to reduce the chances that youâll end up overdrawing your account.
This article was most recently revised and updated by Miranda MarquitThis article was most recently revised and updated by David Schepp
