When a checking account is overdrawn, which can happen when a check bounces, an individual may wonder, “Do I need overdraft protection?” The answer is: It depends. Overdraft protection may suit your financial habits, but it will most likely cost you. According to the Consumer Financial Protection Bureau, Americans paid more than $9 billion in overdraft fees in 2023 alone.
What Is Overdraft Protection?
Overdraft protection is a set of measures put in place to ensure you have enough money in your bank account to conduct transactions such as debit purchases and bill payments.
An overdraft on your account means the bank is attempting to make a withdrawal — like an electronic payment or ATM withdrawal — and there aren’t enough funds to cover the amount requested.
If you opted into overdraft protection, the bank authorizes the withdrawal instead of declining it and pays the difference. This can be beneficial in certain situations that crop up — say, you get paid tomorrow but don’t have the funds today for a purchase you really need, or if there’s a lag between your current vs. available balance. You’ll usually be charged a fee in addition to repaying the amount of the overdraft. In other words, you’re borrowing money from the bank to cover the transaction. You’ll need to pay it back by making a deposit to your bank account to get your account balance to zero or above.
This kind of protection gives you a safety net in a couple of ways. It can prevent you from defaulting on or making a late payment of bills, while also ensuring that you won’t have your debit card declined.
Overdraft is not the same as non-sufficient funds (NSF). This is when the bank will decline rather than cover the transaction due to the fact that there isn’t enough money in your account. You could be charged a fee for this event as well.
How Much Does Overdraft Protection Cost?
Overdraft fees currently average around $35. However, some banks allow you to link a checking and savings account from the same financial institution so that you have no-fee overdraft coverage when money transfers between these accounts.
In some cases, you may pay overdraft fees multiple times in a day, though many banks limit the number of times you may be charged. For example, if you went to the grocery store and your bill came to $35 and you only had $10 in your bank account, you’ll be slapped with an overdraft fee. Later in the day, if your recurring utilities auto payment was processed, you’d face an additional fee for the bank covering that payment — that is, unless your bank limits the number of times you may be charged.
Keep in mind that you generally need to opt into overdraft protection in order for a bank to overdraft your account. That being said, it can depend on the type of transaction — check or recurring electronic payments may not require opt-ins. It’s best to check with your bank if you’re not sure whether you’ve opted for overdraft protection.
It’s important to be aware that in January 2024, the Consumer Financial Protection Bureau introduced a new proposal to reduce overdraft fees to as low as $3. If the proposed rule passes, it could go into effect on October 1, 2025.
Pros of Overdraft Protection
To help figure out whether you should opt in or not, carefully consider the pros and cons of overdraft protection. It has several benefits, including:
• Access to funds when an emergency occurs or during an unexpected event. You can write a check, say, for more than you have available, and it will be paid.
• May expedite transactions, especially when you’re making a necessary purchase like at the grocery store or gas station.
• Could potentially save you from being embarrassed when a transaction is declined.
• May help you avoid fees if you link checking and savings accounts from the same bank.
• Prevent returned check or payment fees from companies, such as utilities companies.
• Can also prevent late bill payment by covering costs.
Cons of Overdraft Protection
Although there are perks to opting into overdraft protection, there are also drawbacks, such as:
• Paying overdraft fees, possibly multiple charges per day
• Could encourage you to overspend, knowing the bank will step in and cover you, rather than becoming motivated to get better with your money
• Your bank account may not be in good standing if you have a history of overdrafts
Should I Get Overdraft Protection?
Whether you should get overdraft protection depends on what your priorities are.
It can help to prevent transactions from being declined, especially when you have recurring automatic payments or when you’re paying for necessities, like a tank of gas. It may offer you peace of mind since you don’t have to wonder whether creditors are going to come knocking on your door because of failed payments.
However, this convenience does come at a price. Being charged an average of $35 per transaction can really add up. It can become downright problematic if your account frequently overdrafts. Most people want to avoid paying bank fees, especially when they are this high.
If you’re concerned about making sure you have enough money to cover transactions, you can take measures to prevent your balance from sinking too low. It’s a smart idea to adopt these measures, described below, whether or not you opt into overdraft protection.
What Happens When You Don’t Have Overdraft Protection?
When you don’t have overdraft protection, your bank will typically decline a transaction if you don’t have the funds to cover it. So a check you write would not be paid or a debit card transaction would not go through if the cash isn’t in your checking account.
However, each bank will determine what action to take depending on the amount overdrawn and the type of transaction. For instance, if you pay someone a small amount via check and there isn’t enough money in your account, your bank might choose to overdraw your account and charge a fee. Or if you’re swiping your debit card to buy something not too costly, some banks may allow the overdraft and not charge a fee as long as you can cover that amount within a certain amount of time.
Tips for Avoiding Overdraft Fees
Your best bet to not pay any overdraft fees is to take measures to avoid your bank balance dipping below zero. Here are a few best practices to avoid overdraft fees:
• Turn on bank account alerts to monitor your balance and notify you — either via text, email or push notifications — when your balance is at a certain amount.
• Download a budgeting app and set up alerts for when you’re overspending.
• Set reminders for when automatic payments go through or when bills are due so you can deposit funds before those dates.
• Link your savings and checking account together (make sure your bank won’t charge you a fee for this type of protection).
The Takeaway
Overdraft protection could be useful, but you don’t want to rely on it too frequently. Otherwise, you might end up paying hundreds of dollars in fees that could go towards other goals. Think carefully about your cash flow and spending habits to decide whether or not it’s right for you.
Luckily, there are financial institutions that don’t charge overdraft fees. This could help you earn, save, and spend responsibly — and work toward achieving financial fitness.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
Should I have overdraft protection on or off?
Whether you should opt into overdraft protection is a personal choice. You should weigh some of the factors such as how often the balance in your account is likely to be close to zero, how many fees you are willing to pay, if you are comfortable with declined transactions, and how often you are able to check your bank account balance.
Does overdraft protection hurt credit?
Overdrafting your bank account generally doesn’t hurt your credit score because this activity isn’t reported to the credit bureaus. However, if you link your bank account to a credit card account (for automatic payments, for instance) and you fail to make a payment, your score might be affected.
Do you have to pay back overdraft protection?
Yes, you’ll need to pay back the amount that’s overdrawn, plus an overdraft fee if the bank charges you one.
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