# Overdraft Protection Explained: How It Works and Is It Right for You?

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## What Is Overdraft Protection?

Overdraft protection is an optional service that prevents charges to a bank account (primarily checks, ATM transactions, and [debit-card](https://www.investopedia.com/terms/d/debitcard.asp) charges) from being rejected when they exceed the available funds in the account. Overdraft protection, sometimes called cash-reserve checking_,_ is used most frequently as a cushion for [checking accounts](https://www.investopedia.com/best-high-yield-checking-accounts-5070332) but can also be applied to savings accounts.

With overdraft protection, even if the account has insufficient funds, the bank will cover the shortfall so that the transaction goes through. Customers select a backup account, such as a savings account, credit card, or line of credit, for the bank to cover overdrafts.

Banks may charge customers in several ways, like with [overdraft](https://www.investopedia.com/terms/o/overdraft.asp) fees, to cover these transactions.

### Key Takeaways

*   Overdraft protection is an optional service allowing bank customers to connect checking accounts to savings accounts, credit cards, or lines of credit to cover transactions that exceed their account balance, preventing checks and debit card transactions from being rejected.  
    
*   The service and any overdraft transactions can incur fees, such as a per-transfer fee or a monthly use fee, adding costs for customers who frequently overdraw their accounts.  
    
*   Without overdraft protection, transactions not covered by sufficient funds are returned unpaid, which can result in multiple fees from both banks and merchants, potentially leading to expensive consequences.  
    
*   The average fees for overdrafts range from $30 to $35 per transaction, but some banks have moved towards reducing or eliminating these fees following public pressure and regulatory scrutiny.  
    
*   Overdraft protection can involve interest and fees if a credit card line is used, as it is treated like a cash advance, demonstrating that while overdraft protection can be convenient, it is important to weigh the costs and benefits.

## Understanding Overdraft Protection Mechanisms

Transactions without overdraft protection are returned unpaid if there aren't enough funds. In other words, checks [bounce](https://www.investopedia.com/terms/b/bouncedcheck.asp), and debit transactions get rejected, which can be expensive and disruptive for the customer.

Typically, banks charge $30 to $35 per transaction for overdraft and [non-sufficient funds (NSF)](https://www.investopedia.com/terms/n/nsf.asp) fees. However, several larger banks have reduced or eliminated the NSF fee for accounts with insufficient funds.

Banks can refuse payment and charge fees, and merchants may impose penalties for failed transactions.

To avoid overdraft and NSF fees, [customers who choose overdraft protection](https://www.investopedia.com/ask/answers/071114/what-are-pros-and-cons-overdraft-protection.asp) link their [checking accounts](https://www.investopedia.com/terms/c/checkingaccount.asp) 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 withdraws from an ATM for an amount that exceeds the [checking account](https://www.investopedia.com/free-checking-accounts-8697609) 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 an additional fee every month that overdraft protection is used or a fixed monthly fee for continuous protection.  

> **Important**
>
> If you bounce a check, you can incur a variety of charges or, in extreme cases, your bank can close your account, which also affects your ability to open a new checking account.

## Real-Life Scenario: Using Overdraft Protection

 If a renter writes an $800 check with only $650 in their account, overdraft protection allows the check to clear, drawing from the linked account.

The bank might charge a $15 transfer fee for transactions that exceed 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](https://www.investopedia.com/average-credit-card-interest-rate-5076674), line of credit, or [savings account](https://www.investopedia.com/best-high-yield-savings-accounts-4770633).

## Important Factors to Consider With Overdraft Protection

Overdraft lines of credit may range from $500 to $7,500, with interest and fees applied.

### Multiple Overdraft or NSF Fees

Without overdraft protection, banks may charge multiple overdraft or NSF fees per day. For example, a consumer might make successive purchases without realizing their account balance is insufficient to cover the charges. If a [checking account](https://www.investopedia.com/best-joint-checking-accounts-5088312) goes negative for more than a few days, banks may 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.

If an account holder uses a [credit card](https://www.investopedia.com/how-to-use-a-credit-card-5069558) as overdraft protection, the amount covered by the card gets treated as a [cash advance](https://www.investopedia.com/terms/c/cashadvance.asp)—which can be costly.

[Credit cards](https://www.investopedia.com/articles/pf/10/credit-card-debit-card.asp) typically charge a cash-advance fee, such as a $10 flat fee or 5% of the advance, whichever is greater. Credit cards also charge a high interest rate on the balance, and cash advances have no grace period, meaning interest accrues immediately.

A linked [savings account](https://www.investopedia.com/the-best-savings-account-bonuses-8763913) is probably the least expensive form of overdraft protection, but you must have enough money in the savings to cover the shortfall in the first account.

## Current Trends and Future Direction of Overdraft Protection

Overdraft fees have always been among the most controversial bank fees. According to a 2024 Bankrate.com survey of 10 banks and thrifts in each of 25 large U.S. markets, the average overdraft increased to $27.08, from $26.61 in 2023.

In the wake of the 2020 pandemic, public debate accelerated a trend toward [eliminating overdraft fees](https://www.investopedia.com/federal-financial-watchdog-wants-to-cut-overdraft-fees-to-as-little-as-usd3-8430578). For example, the U.S. Senate held hearings on how and why banks charge fees for insufficient funds and criticized bank chief executives for refusing to halt overdraft fees during the pandemic.

More 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.  

## Is There a Limit on Overdraft Fees?

Federal laws don't specify maximums that banks can charge for overdrafts, but banks must disclose any fees at the account opening and give customers advance notice of fee increases.

## Can Banks Refuse to Cover Overdrafts?

Banks aren't required to offer overdraft protection, and—even when they do and a customer opts in—banks retain the right to pay or not pay a particular overdraft transaction that might fall outside the rules of the agreement.

## Is Overdraft Protection Mandatory?

Overdraft protection is optional; it is only automatic for bank customers who opt for overdraft protection on their checking or [savings accounts](https://www.investopedia.com/the-best-savings-accounts-for-kids-8783880).

## The Bottom Line

Overdraft protection is an optional service that prevents transactions from getting rejected or bounced if the linked account has insufficient funds. Overdraft protection deposits money into the account to cover the shortfall, allowing charges to go through instead of receiving an insufficent funds fee. Banks charge a fee for this service, so it is worth comparing that cost with the expected losses from bounced payments before choosing this service.

> **Article Sources**
>
> 1.  HelpWithMyBank.gov. "[What Is Overdraft Protection?](https://www.helpwithmybank.gov/help-topics/bank-accounts/nsf-fees-overdraft-protection/overdraft-protection-programs/overdraft-protection.html#:~:text=Overdraft%20protection%20is%20an%20agreement,to%20a%20preset%20maximum%20amount.)"
>     
> 2.  Consumer Financial Protection Bureau. "[Vast Majority of NSF Fees Have Been Eliminated, Saving Consumers Nearly $2 Billion Annually](https://www.consumerfinance.gov/data-research/research-reports/vast-majority-of-nsf-fees-have-been-eliminated-saving-consumers-nearly-2-billion-annually/#footnote-1)."
>     
> 3.  SoFi. "[How Overdraft Lines of Credit Work](https://www.sofi.com/learn/content/overdraft-line-of-credit/)."
>     
> 4.  Chime. "[What Is a Credit Card Cash Advance Fee](https://www.chime.com/blog/cash-advance-fee/)?"
>     
> 5.  Bankrate. “[Survey: Free Checking Accounts on the Rise as Total ATM Fees Fall](https://www.bankrate.com/banking/checking/checking-account-survey/#overdraft).”
>     
> 6.  Elizabeth Warren, U.S. Senate. "[At Hearing, Warren Calls Out JPMorgan Chase, Bank of America, and Wells Fargo For Continuing to Collect Billions in Overdraft Fees.](https://www.warren.senate.gov/newsroom/press-releases/at-hearing-warren-calls-out-jpmorgan-chase-bank-of-america-and-wells-fargo-for-continuing-to-collect-billions-in-overdraft-fees)"
>     
> 7.  American Banker. “[Pressure Mounts on Credit Unions to Cut Overdraft Fees](https://www.americanbanker.com/creditunions/news/pressure-mounts-on-credit-unions-to-cut-overdraft-fees).” (Subscription required.)
>     
> 8.  HelpWithMyBank.gov. “[Is There a Limit on Overdraft Fees](https://www.helpwithmybank.gov/help-topics/bank-accounts/nsf-fees-overdraft-protection/overdraft-protection-programs/overdraft-fee-excessive.html)?”
>     
> 9.  Consumer Financial Protection Bureau. "[Understanding the Overdraft 'Opt-in' Choice](https://www.consumerfinance.gov/about-us/blog/understanding-overdraft-opt-choice/)."