Can You Overdraft With a Debit Card? Understanding Your Options and Risks
It’s possible to overdraft your account with a debit card if you have signed up for your bank’s overdraft coverage, which can enable a transaction to go through even when the account is short of the funds needed to cover it. However, you may wind up paying expensive overdraft fees on your purchase or withdrawal.
Overdraft fees have been around for so long now, many consumers may simply accept them as a cost of doing business with their bank or credit union. But you may not want to do so. Read on for a closer look at what opting into your bank’s overdraft service could mean specifically for debit card transactions.
Key Points
• Overdrafting occurs when an account owner’s spending exceeds their account balance but the bank still covers it, leading to potential overdraft fees.
• With standard overdraft coverage, a bank may (at its discretion) cover a transaction even if it overdraws an account, though it would typically charge an overdraft fee.
• With debit cards and ATMs, a bank customer must opt-in to overdraft coverage, consenting to the related overdraft fees.
• Overdraft protection programs allow account holders to link to a backup account, from which the bank can pull funds when the primary account is overdrawn.
• Account holders may be able to reduce or avoid overdraft fees by linking accounts, using credit cards or other payment methods, or choosing low- or no-fee banks.
What Does It Mean to Overdraft With Your Debit Card?
Overdrafting with a debit card means that you may spend more money than you actually have in the account.
If you don’t have enough money in your bank account to cover a debit card transaction, you can expect one of two things to happen.
• Your bank may decline your request, leaving you empty-handed at the cash register or ATM.
• Your bank could allow the transaction to go through. Technically, you will have overdrawn your account, because your account balance will fall below zero. But you’ll get what you wanted — some cash, a latte, movie tickets, etc. And you’ll be saved from potential embarrassment in front of co-workers or friends.
The second outcome may seem more satisfying, at least for the short-term. But there’s a catch: Your bank may only let the transaction go through if you participate in its overdraft coverage or protection program, and you can be charged a fee for this service.
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What Is Overdraft Coverage vs. Overdraft Protection?
Many financial institutions offer overdraft programs that will let your transactions go through, at least temporarily, if you don’t have enough money in your account. But the rules — and fees — for this service can vary significantly from one bank and bank account to the next, so it’s important to understand what you’re signing up for.
Standard Overdraft Coverage
Many banks offer some type of standard overdraft coverage for their consumer checking accounts. Generally, if you overdraw your account with a check, automatic bill payments, or recurring debit card transactions, the bank may process the transaction anyway (at its discretion and usually up to a certain limit). But it will typically cost you: Your bank may charge an overdraft fee. And you’ll still have to get your account back in the black ASAP to avoid multiple fees. So while you can overdraft a debit card with no money in your account, it can get pricey.
Overdraft Protection
Overdraft protection services work a little bit differently. With this type of program, you can designate a backup account (a savings account, credit card, or line of credit, for example) to cover any shortfalls. The bank will automatically transfer money to your overdrawn checking account.
You’ll likely still be charged for this service, but this “transfer fee” may be lower than the bank’s overdraft fee. Before opting into any overdraft program, it’s important to understand the specific terms and fees.
How Are Debit Card Overdrafts Different?
You may not have a choice when it comes to paying fees when you overdraw your account with a check or automated clearing house (ACH) payments. If the bank approves the transaction, you can expect to pay an overdraft fee. If it declines the transaction, you’ll likely face a non-sufficient funds (NSF) fee. This charge means that even though the transaction wasn’t completed, you still will pay for the inconvenience the bank experienced due to the situation.
But your bank can’t charge you fees for overdrafts on most debit card transactions unless you have specifically opted in to those charges.
Opt-In vs. Opt-Out Policies
Deciding whether you want or don’t want to pay overdraft fees on debit card transactions can be a pretty complicated decision. Policymakers at the Federal Reserve decided in 2010 to change the previous process that involved having to opt out of overdraft coverage (that is, customers could be automatically enrolled in the service). Since then, bank customers have to opt in by signing paperwork that says they understand the fees and they want their bank to process their debit card transactions even when they’re short of funds.
• If you opt in to debit card and ATM overdraft coverage, you can expect withdrawals and purchases to go through even if you don’t have enough funds in the bank at the time of the transaction. But you will likely be charged a fee in exchange for this service. (See below for pricing specifics.)
• If you don’t opt in to debit card and ATM overdraft coverage, you may experience one-time ATM withdrawals and debit purchases being declined if you don’t have enough money in your account at the time of the transaction. You can avoid paying an overdraft fee for those transactions, but it will be up to you whether you want to use a credit card or some other method to complete the transaction.
• Keep in mind, though, that even if you don’t opt in to overdraft coverage for your debit card, you could still face fees. If you’re short of funds when the bank processes an automatic payment through your debit card — for a gym membership or subscription service, for example — you might face an overdraft fee if the bank chooses to complete the transaction. And if the payment is declined, you may be charged an NSF fee.
Recommended: How to Get a Debit Card
Costs and Fees Associated With Overdraft Services
Federal regulators have proposed lowering overdraft fees to as little as $3, but currently they average around $26 to $27. And though some banks don’t charge overdraft fees on checking accounts, 94% of accounts at financial institutions still have them, according to a recent survey. And they can run as high as $38 or so.
Some banks also may charge what are known as “continuous” overdraft fees, or daily overdraft fees. These are charges assessed every day the account remains overdrawn, and the fees can add up quickly.
Your bank may waive the fee on a smaller purchase. Also, if it’s the first time you’ve overdrawn your account — or it’s been a while since you did so — the bank might remove the fee if you call and ask.
Should You Overdraft With a Debit Card?
If you’ve opted in to debit card overdraft coverage, it may seem worth the risk of overdrafting if you need some quick cash or to fill your gas tank in a pinch when you’re low on funds. But if you have other resources (whether it’s a credit card or a piggy bank), you might want to tap those first. Keep potential fees in mind — not to mention the stress of knowing your checking account will have a negative balance — as you ponder this strategy.
Recommended: 10 Personal Finance Basics
How to Avoid Overdraft Fees
Understanding how opt-in overdraft coverage works is one way to avoid triggering unnecessary bank fees. But there are other proactive steps you may want to consider, as well, including the following:
Choose a Bank That Doesn’t Charge Overdraft Fees
Some banks don’t charge overdraft fees; often, they cover you up to a specific overdraft limit, such as $50. Others may offer one or two fee-free account options. (If bank fees overall are an issue for you, keep in mind that online banks often have lower costs than traditional brick-and-mortar institutions.)
Use Credit Cards for Emergency Expenses
If you have a relatively low-interest credit card or you’re able to pay off your credit card balance every month to avoid accruing interest, it may make sense to use your credit card for emergency expenses. Thinking about which card you’re going to use before an emergency comes up could help you make the best decision.
Link Accounts for Overdraft Protection
Linking your checking and savings accounts can allow your bank to quickly move funds to cover negative balances. Though you might pay a transfer fee, it’s usually less than an overdraft fee.
Build an Emergency Fund
Having an emergency fund that can cover three to six months’ worth of expenses is a good goal, but even a smaller amount of savings may allow you to deal with the kinds of unexpected expenses that can trigger debit card overdrafts. A high-yield savings account can help you grow your money while also keeping it accessible.
Steps to Help You Better Manage Your Debit Card
If the convenience of using a debit card has made it your go-to tool for accessing cash and making purchases throughout the day, there are steps you can take to prevent overdrafts.
Monitor Your Accounts
Using a tracking tool to monitor your checking account and other account balances, can help you avoid an overdraft.
Set Up Low Balance and Other Alerts
If your bank offers account alerts, consider setting up a notification so you know when your checking account balance is getting low.
Know When Your Bills Are Due
Putting together a budget can help you pay your bills on time and organize your payment dates. Then, you might also see if you can move some payment dates. For instance, you could ask your credit card issuer to shift your date. That way, your checking account won’t be drained due to having so many payments in the same pay week or pay period.
The Takeaway
You may be able to overdraft your debit card transactions if you have overdraft coverage. This means your bank will cover the transaction, but you will likely be charged a fee for this privilege. If you choose not to opt into your bank’s standard overdraft coverage, there’s a good chance that a debit card transaction that would take your account into a negative balance would be denied.
The rules and fees for overdrawing your account with a check, automatic payment, or debit card can vary significantly depending on where you bank, so it’s a good idea to read all the paperwork you receive when you sign up for an account.
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FAQ
What happens if I overdraw with my debit card without overdraft coverage?
Here’s what happens if you overdraft with a debit card: If you don’t have overdraft coverage and you don’t have enough money in your bank account to cover the transaction you’re trying to make, your bank will likely decline the purchase or withdrawal. You won’t overdraft your account and you won’t have to worry about paying an overdraft fee, but you will have to find another way to finance your transaction or skip it.
How much does overdraft coverage typically cost?
Overdraft fees can vary depending on the bank and other factors, including whether you have a backup account or credit card linked to your checking account. One recent survey found an average fee of around $26 or $27. That said, there is a movement afoot to lower these fees considerably which may or may not impact future charges.
Can I overdraft using my debit card at an ATM?
If you’ve opted in to your bank’s overdraft coverage, your ATM withdrawal may go through, even if you withdraw more than you actually have in your account. You can expect to be charged an overdraft fee for this service. If you don’t opt in to overdraft coverage, the transaction will likely be declined, and you won’t be charged an overdraft fee, but you won’t be able to access the funds you’re seeking.
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