What is Overdraft Protection and Why do you Need It?

Estimated read time: 3 minutes

When you are shopping around for a bank, you've likely come across the bullet point, "Overdraft Protection". Some banks offer it for free, others will charge you. What you need to figure out is what exactly overdraft protection means and why you may need it for your account. Let's break down overdraft protection, it's benefits, and how it affects you so you can decide if opting in is right for you.

Overdraft protection explained

With overdraft protection you can link one account (typically your checking account) to another account you have with your bank. This could be a savings, secondary checking account, or a credit card. You need to make sure another account is linked, though. If you don't have another funding source linked but still have overdraft protection, you'll be charged a fee for each transaction made in the negatives.

When you have another account connected for overdraft protection you will have your funds automatically transferred from your linked account to cover purchases you don't have the balance to pay for. This prevents you from having to pay additional fees like returned checks and declined items when you don't have enough money in your account.

How to get overdraft protection

If you're shopping around for banks, this could be a good time for you to consider institutions that offer this service for free. Otherwise, check with your bank to see if you can add it to your existing account, and find out what it costs. A lot of times you can login to your online banking account and add it.

Eliminating overdraft fees from your life

The most basic reason to avoid overdraft fees is they get expensive. The fees can make it hard for you to keep your account afloat if they happen on a regular basis.

Your bank could also report your overdraft fees to the credit bureaus. When this happens, it can make it more difficult for you to get a loan on a home, car, or other big purchase. Even if you can still qualify for a loan, you will almost certainly be paying a higher interest rate for it.

There are some four primary ways banks make it possible for you to avoid paying those pesky overdraft fees. If your bank won't work with you, then you may need to seriously consider switching your bank to one that has more flexible options.

Get an overdraft line of credit

In the place of an overdraft fee when you overdraw your account, there are banks that allow you to use a credit line. With an overdraft line of credit you will likely pay an interest rate on your negative balance. If you pay that balance within a couple of days, which is likely since most customers pay back their overdrafts in three days, you will be paying minimal interest.

If you decide to go with an overdraft line of credit, keep in mind you will need to have a good credit score to get approved. Your bank will also run a hard credit check on you to determine if you qualify. This means your credit score will be affected, which may not be ideal if you are looking to make a big purchase like a car or house.

Switch banks to one that offers no overdraft fees

If you are regularly paying overdraft fees with your bank, then maybe it's time to consider alternatives. In particular, there are some online banks that will allow you to overdraft on your account without having to pay a fee.

Get your credit card connected to your account

A lot of banks will allow you to link your credit card to your bank account for overdraft protection. Check your bank policies with this because it's more than likely that your bank account and credit card need to be from the same bank in order to get you overdraft protection.

Set up an automatic savings transfer

If you have a savings account with the same bank that your regular account is, the you might be able to opt in for an automatic transfer. With this feature, any shortfalls that your account may come across will in a transfer from your savings account.

Ask your bank about this option because they may have limitations as to the number of withdrawals that may occur every month. If you go beyond this limit, then you may still be liable for an overdraft fee.