When your personal checking account balance dips below zero dollars, you have overdrawn your account.
Traditional bank overdraft fees are like adding insult to injury.
You’re already out of money in your bank account, so your bank charges you more in fees, possibly without telling you.
What is an Overdraft Protection Transfer?
An overdraft protection transfer is a way to skip the overdraft fee and have your account automatically transfer money from a linked deposit account to cover the transaction. Usually, the linked account is a savings account from the same bank.
The typical fee for overdraft protection transfer is $10 to $12.50 per transfer.
Legally, you must provide consent to allow the bank to overdraw your account when needed. If you have opted-in, perhaps inadvertently when you signed up for your account, you can opt-out at any time.
Here are the overdraft protection fees at the top U.S. Banks:
Comparing Overdraft Protection Transfer Fees
|Bank||Overdraft Transfer Fee|
|Bank of America||$10|
|Chase||$0, but every transfer counts towards your savings withdrawal limit (6), which is $5 after the 6th transfer/withdrawal|
|U.S. Bank||$12.50 ($7.50 for Gold Checking and $0 for Platinum Checking)|
|BB&T||$12.50 ($9 for Elite Gold and Elite Work accounts, and $0 for Asset Management accounts, Wealth Vantage, & Private Vantage accounts)|
|Santander||$12 (referred to as "Sweep Fee")|
|Fifth Third Bank||$12 for Essential Checking ($10 for Better Checking accounts and $0 for Enhanced and Preferred Checking accounts)|
|Ally||$0, but every overdraft protection transfer counts towards your savings withdrawal limit (6)|
How Checking Account Overdrafts Happen
Most people, at one point or another, have exceeded the balance of available funds in their checking account.
It is easy to do if you forget about an automatic payment, or simply miscalculate how much money is in your account. It may happen even if you don’t make a purchase somewhere.
For example, if you have bills automatically paid on the 18th of the month, and your automatic payroll deposit on the 15th of the month is delayed.
And, unless you are checking your account balance daily, or have email or text notifications set up regarding your account balance, you may overdraw your checking account and not even know it.
Understanding How Overdraft Coverage Works
Banks charge fees when your account dips into the red. Your bank may pay for the transaction, or choose to decline it.
Either way, a fee may be charged. In the case that your bank elects to pay for the purchase, you may be charged an overdraft fee.
In the case that your bank declines the purchase, you may be charged an NSF (non-sufficient funds) fees. These fees can be hefty.
Overdraft Fees at Top Banks
|Bank||Overdraft Fee||Max # Of Fees Charged Per Day|
|Bank of America||$35||4|
|Fifth Third Bank||$37||5|
|BMO Harris Bank||$35||4|
Some banks charge an extended overdraft fee, or a sustained overdraft fee, if your bank stays in the negative for a certain amount of time, typically 5 days or a week.
These fees can be crippling for those that live paycheck to paycheck, potentially pushing them into a hole they cannot get out of without a loan.
The business of account overdraft service charges is big. According to a large Consumer Financial Protection Bureau (CFPB) study of banks’ overdraft protection programs and fees, the service charges on deposits reported by banks in 2012 totaled $34.2 billion. The National Credit Union Administration (NCUA) reported income earned from NSF (non-sufficient funds) and overdraft fees for that same year to be $7.4 billion.
The CFPB study found that bank accountholders that incurred one or more overdraft of NSF fees paid an average of $225 in such fees per year.
You Must Opt-In for Overdraft Coverage or Protection
In 2010, a new law was passed, generally prohibiting financial institutions from charging fees for paying ATM and debit card transactions that overdraw consumer accounts unless the consumer affirmatively consents, or opts in, to the overdraft coverage or protection program.
In other words, you must tell your bank that you want overdraft protection (and the fees that come along with it).
Note: These regulations do not apply to fees associated with debit card transactions for automatic bill payments. So, talk to your bank about options for those transactions.
It’s easy for “overdraft service” or “overdraft protection” to be passed along as a benefit to you in the checking account sign-up process, like free electronic statements or free paper checks.
Opting in may seem easy and like an obvious “yes”. After all, there’s no cost to opt-in, and the word “protection” sounds like something we want.
But the benefit to the bank for you opting-in is bigger than the benefit to you.
If you opt-in to overdraft protection, you may be 2.5 times more likely to have your bank account closed due to a negative balance.
If you’ve had a checking account closed by a bank, it can be much harder to open a checking account at a different bank.
Consider an Overdraft Line of Credit
An overdraft line of credit is a loan where your bank transfers funds to your checking account to cover an overdraft.
Capital One is an example of an account that offers an Overdraft Line of Credit. Citibank also offers an optional line of credit with their Checking Plus account.
You’ll pay interest on the overdrawn amount for the length of time you borrow funds.
Although the interest may be low if you pay the balance after a couple of days, pay close attention to fees associated with the transactions.
Why You May Want to Reconsider Overdraft Protection
Wherever you bank, you should know the fees associated with your checking account.
Although no one likes being told that their card declined while trying to pay for a meal or a grocery purchase, having the transaction declined and whipping out your credit card and covering the transaction may be much cheaper than paying a cash advance fee on your credit card or a $12.50 overdraft protection fee to transfer money from your savings account.
It is better for you to manually transfer money from your savings account prior to making a purchase than have your bank automatically transfer funds as part of an overdraft protection transfer.
Accounts With No Overdrafts
While it may be possible to opt out of overdraft service and overdraft protection, banks have come up with options for individuals who simply want to avoid the possibility of overdrawing their accounts altogether.
Even with so-called overdraft fee-free accounts, you still need to be careful.
For example, when you purchase a meal in a restaurant, the server will run the card for the meal amount, which is authorized by your bank. Then if you add a tip, the server will adjust the transaction amount to reflect the total with the tip. If the tip exceeded your checking account balance, you could still overdraw the account.
An alternative to such an account, or a checking account with overdraft services and overdraft protection opted-out, is a prepaid debit card.
These are very similar to bank accounts but you will not have the risk of incurring overdraft fees.
Typically, these alternatives prevent overdrafts by not offering checks.
How to Avoid Overdrawing Your Account
The number one way to avoid overdrawing your account is simple, like abstinence.
Don’t spend more money than you have.
You should make every effort to avoid exceeding the balance on your checking account.
Keep a buffer and set alerts
Aim to keep a cushion of a certain amount in your checking account, and never spend below that amount. This could be $10, $50 or $100.
If you haven’t already, install your bank’s app on your smartphone to easily check the balance and plan your purchasing decisions.
Many banks also have services that let you check your account balance by text, or automatically send you a notification if your account dips below a certain balance.
Opt out of overdrafts
Consider opting out of overdraft coverage, so that your debit card will simply be declined, and you will not be susceptible to overdraft coverage service fees.
While opting out of overdraft coverage may mean purchases get declined, this will save you possibly massive fees in the long run.
Overdraft protection transfers are simply reducing the costs of overdrafts. Ideally, you're not overdrawing at all.
When evaluating whether you should opt-in for overdraft protection, to link your checking account to a savings account, consider how much you’ll use it, and how much you need it.
There is no harm in having it if you have good money habits, and it may be nice to have in a bona fide true emergency.
However, if it will cost you hundreds of dollars in fees each ear, you may be better off skipping the fees and trying to keep that small cushion in your checking account at all times.