Overdraft protection

What It Means

OverdraftOverdraftWhen a payment is bigger than your checking balance and the bank pays it anyway, leaving a negative balance you owe back, usually plus a fee. See more protection is a bank or credit unionCredit unionA not-for-profit financial cooperative owned by its members, offering accounts and loans to people within the field of membership its charter sets. See more service for when your checking accountChecking accountA bank or credit union account for everyday money going in and out, used by debit card, checks, transfers and direct deposit. See more can't cover a payment, and the name is used for two different things. (1) A linked account: checking is connected to a savings accountSavings accountA bank or credit union account for money you're setting aside for later, which earns interest and is insured up to federal limits at insured institutions. See more, credit card or line of credit, and money moves over to cover the gap, often for a transfer fee that the CFPB says is lower than an overdraft feeOverdraft feeThe flat charge a bank adds each time it pays a transaction your checking account couldn't cover, on top of the negative balance you repay. See more. (2) Fee-based overdraft coverage: the bank pays the item, your balance goes negative, and you're charged an overdraft fee; banks and regulators sometimes call this overdraft protection as well.

How It Sounds at Home

• "I've got my savings linked, so it just pulls from there."
• "I thought I had overdraft protection, but they still charged me."
• "Did you opt in to overdraft on your debit card?"

The Breakdown

A short example. Ana has $50 in checking and $400 in a savings account linked for overdraft protection. Her $110 electric bill comes out by autopay on the 3rd. The bank moves enough from savings to cover the $60 gap, charges its transfer fee, and the bill is paid. Without the link, her bank would have paid the bill as an overdraft with an overdraft fee, or returned it with an NSF fee.

Where it goes wrong.

• The linked savings account is low, so the transfer can't cover the gap, and whatever the bank does next (pay it as an overdraft or return it) has its own fee.
• The link points to a credit card or line of credit, so the transfer is borrowed money and that account's terms decide what it costs.
• Someone believes they have a linked savings account when what they signed up for is fee-based overdraft coverage under the same name.
• A debit card opt-in given years ago is still on the account and nobody remembers agreeing to it.

What to watch.

• The transfer fee, which is in your fee schedule.
• The balance in the linked account, especially after a big withdrawal from savings.
• Whether you've opted in to overdraft coverage for ATM and debit card transactions, which is a separate choice from the linked account.

Good to Know

The CFPB's "Know your overdraft options" page says a transfer from linked savings typically costs less than an overdraft fee, and that you can change your overdraft choice at any time by telling your bank or credit union. Under Regulation E (12 CFR 1005.17), a bank must get your opt-in before charging overdraft fees on ATM withdrawals and one-time debit card purchases, and its written confirmation has to say you can revoke it. Your account agreement lists which kinds of overdraft protection your bank offers and what each costs.

Related Terms and Categories

• Overdraft

  When a payment is bigger than your checking balance and the bank pays it anyway, leaving a negative balance you owe back, usually plus a fee.

• Overdraft fee

  The flat charge a bank adds each time it pays a transaction your checking account couldn't cover, on top of the negative balance you repay.

• Savings account

  A bank or credit union account for money you're setting aside for later, which earns interest and is insured up to federal limits at insured institutions.

• Checking account

  A bank or credit union account for everyday money going in and out, used by debit card, checks, transfers and direct deposit.

• Available balance

  The money in a bank account you can use right now: the posted balance minus pending card purchases and any deposit the bank is still holding.

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