Understanding Overdraft: Fees, Protection, and More
It can be expensive to overdraw your account – and around 30% of Americans overdraw their checking accounts annually. Most overdrafts are accidental, so it’s important to develop a plan for dealing with those unexpected instances. Here’s everything you need to know about overdraft and your options for protecting your account.
What is overdraft?
Overdraft occurs when you withdraw more than your balance in your account. For example, if you only have $10 in your account and you buy a $20 meal using your debit card, you will have a balance of -$10. When this happens, your account is considered “overdrawn.” An overdraft can occur with a debit card transaction, a written check, cash withdrawals, or Automated Clearing House (ACH) payments. An ACH payment is an electronic payment or money transfer.
What happens when you overdraw your account?
Sometimes, your bank will prevent you from withdrawing more than your current account balance and will reject your transaction. This means you won’t be able to make a purchase higher than your current balance until you deposit more money. If you have ever had your debit card declined, this is due to non-sufficient funds in your account. Your bank may charge you a non-sufficient funds fee (NSF).
Other times, your bank may approve the transaction, and your account will hold a negative balance. Called overdraft coverage, your bank covers the difference until you repay it in full. However, your bank will likely charge you an overdraft fee depending on the amount you overdraw.
What is an NSF fee?
The NSF fee is typically around $35 per rejected transaction, but it may be higher or lower depending on your bank. This charge will occur only when your bank rejects your withdrawal request due to insufficient funds in your account.
What is an overdraft fee?
The amount can vary, but an overdraft fee is usually around the same amount as an NSF fee. If you continue to overdraw your account, you will be charged an overdraft fee per transaction. There are limits to the number of overdraft fees a bank or credit union will charge per day.
What is overdraft protection?
Overdraft fees as well as NSF fees can add up quickly. Some banks offer overdraft protection as an optional service for checking or savings accounts, which can be a cheaper alternative to overdraft coverage and guarantees that a transaction will be allowed. Overdraft protection is opt-in only – you must agree to it before it is added to your account.
Types of Overdraft Protection
The two most common types of overdraft protection are bounce protection and overdraft sweep.
What is bounce protection?
If you opt in for bounce protection, you authorize your bank to pay overdrafts for your transactions, including debit card, ACH, and check payments. There can be a fee associated with overdraft protection – depending on the amount you overdraw – but the overdraft protection fee is usually cheaper than overdraft or NSF fees.
What is overdraft sweep?
Some customers opt in for sweep protection, which is when you authorize the bank to automatically transfer funds from a savings account to your checking account to cover any overdrafts. The “sweep” covers potential overdrafts and allows you to avoid overdraft charges. Not all banks charge a fee for overdraft sweep; however, you must have sufficient funds in your savings for the automatic transfer to go through.
Explore Your Overdraft Options
Overdraft protection can provide peace of mind in your day-to-day life. Do your research and pick the option that works best for you – and remember that overdraft protection is your backup, not the default. Take care to monitor your account balances and transactions to avoid overdrawing and potential fees, and let your overdraft protection be the buffer you need in unusual circumstances.
Understanding Overdraft: Fees, Protection, and More
This blog post was published by Axos Bank on January 18, 2023 and last updated on January 18, 2023.
