how overdraft protection works
without overdraft protection transactions that have insufficient funds to cover them are returned unpaid that is checks bounce and debit transactions are refused which can be expensive and disruptive for the customer most banks charge hefty overdraft and non sufficient funds nsf fees between 30 and 35 per transaction on average for accounts that do not have sufficient funds what s more not only can the bank refuse payment and charge the account holder but a penalty or fee may also be charged by the merchant for the failed transaction 1to avoid overdraft and nsf fees customers who choose overdraft protection link their checking accounts to credit cards savings accounts or other lines of credit that kick in whenever they withdraw more than the current balance this amounts to an automatic pre approved loan or transfer every time the customer with insufficient funds writes a check makes a wire transfer swipes a debit card or asks an atm for a sum in excess of the balance as soon as the overdraft protection service is triggered the linked account is charged a transfer fee to move funds to cover the shortfall the account holder may also be charged either an additional fee every month that overdraft protection is used or a fixed monthly fee for continuous protection if you bounce a check you can incur a variety of charges or in extreme cases your bank can close your account which also impacts your ability to open a new checking account example of overdraft protectionif a renter with overdraft protection writes an 800 check on an account with a balance of 650 the overdraft protection from their linked account kicks in as soon as the check is cashed and the check clears instead of bouncing due to insufficient funds the bank charges a transfer fee of 15 for approving a transaction that exceeds available funds the renter will now have a balance of 635 650 15 in the account as well as a charge of 800 to pay off on the linked credit card line of credit or savings account in the absence of overdraft protection it is not uncommon for banks to charge multiple overdraft or nsf fees per day for example a consumer might make successive purchases without realizing that the amount in their account is insufficient to cover the charges if a checking account goes negative for more than a few days many banks also charge an extended overdraft fee it s important to note that even if you have overdraft protection banks can still charge this additional fee special considerationslines of credit for overdraft protection can range from 250 to 5 000 and above and of course customers incur interest charges and transaction fees for using these lines if a credit card is used as the backup account the amount is treated as a cash advance which can be an expensive form of overdraft protection not only do cash advances have no grace period but they also have high interest rates and high fees usually 10 flat fees or 5 of the advance whichever is greater a linked savings account is probably the least expensive backup account for overdraft protection but the backup must hold enough money to cover the shortfall in the first account trends in overdraft protectionoverdraft fees have always been among the most controversial bank fees according to a bankrate com survey of 245 banks and thrifts in 25 large u s markets the average overdraft fee declined to a 13 year low of 29 80 which is down 11 over last year s record high of 33 58 2in the wake of the 2020 pandemic public debate accelerated a trend toward eliminating overdraft fees altogether for example the u s senate held hearings on how and why banks charge fees for insufficient funds and criticized bank ceos for refusing to halt overdraft fees during the pandemic 2more evidence of this trend includes a 2022 american banker report that as big banks made headlines for reducing or eliminating overdraft fees even credit unions felt pressure from regulators and digital bank competitors to do the same 3