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How Does Overdraft Protection Work?

If you spend more money than you have in your account, overdraft protection can help. But what is overdraft protection, and how exactly does it work?

August 2, 2021

Whenever a debit card transaction, check payment or bill pay transaction is made, there must be sufficient funds in the checking account in order to cover the purchase. If funds are insufficient, the transaction may be declined by the bank. 

If a customer has overdraft protection enabled, the bank will automatically transfer funds to cover the transaction, allowing the purchase to still go through. But what is overdraft protection exactly, and how does it work?

Overdraft Basics

An overdraft occurs when a sum of money that exceeds the current account balance is withdrawn or spent from an account. 

For example, consider an individual who has $1,150 in their checking account. They write a $1,250 check to their landlord, who cashes it immediately. Because the checking account does not have sufficient funds, an overdraft occurs.

In this example, one of two things can happen, depending on the bank and the individual’s account settings:

  • The check can “bounce” due to insufficient funds, and the transaction will not go through. The bank will charge a non-sufficient funds (NSF) fee, and the landlord may also charge fees or penalties for a bounced check. This scenario is likely if overdraft protection is not enabled.

  • The check can go through, despite insufficient funds. The bank will charge an overdraft or transfer fee, and will transfer funds from a linked account (such as a savings account, credit card or line of credit) in order to cover the transaction.

    This scenario is likely if overdraft protection is enabled.

The example above uses a check payment, but overdrafts can occur with any type of transaction. Debit card transactions, ATM withdrawals, bill payments and written checks can all be subject to overdraft if the checking account does not have sufficient funds to cover the transaction. 

Check payments and bill pay transactions are likely to go through, even if the customer is not opted into a specific overdraft protection service; ATM and debit card transactions will generally be declined by default, unless overdraft protection is enabled. 

Any size transaction can trigger an overdraft and/or NSF fee. A $1,250 check or a $1.50 debit card purchase could both result in an overdraft, and the fees charged will typically be the same. 

Overdraft Fees and NSF Fees

When a transaction is made and the checking account funds are insufficient, the bank will typically charge a fee. There are a few types of fees for these transactions: 

  • Non-sufficient funds (NSF) fee - Typically $30 to $35+ per occurrence. This fee applies to accounts that do not have overdraft protection or automated transfers set up. Additionally, the merchant may apply their own fees or penalties, particularly in the case of a bounced check. 

  • Overdraft account fee - Typically $25 to $35+ per occurrence. This fee applies to accounts that have overdraft protection enabled, and have set up a funding source (savings account, credit card, etc.) to cover the shortfall in funds. 

  • Financing fee - Costs vary. Financing fees and/or interest charges may apply to accounts that do have overdraft protection enabled, and that opt for an overdraft line of credit. 

Keep in mind that overdraft and NSF fees are always per occurrence. This means that it’s possible to be charged multiple fees in one day, if a customer makes several transactions without realizing that their account is overdrafted. 

How Does Overdraft Protection Work?

Overdraft protection is an optional feature of most checking accounts that allows transactions to still go through, even if there are insufficient funds in the account. 

Here is how the service works:

  1. A bank customer opts in to the overdraft protection service from the bank. The specific terms will vary by bank.

  2. The customer sets up an additional source of funding to cover transactions that result in overdrafts. This could be a savings account, credit card or line of credit.

  3. If a transaction is made and there are insufficient funds in the account, the bank will still process the transaction. 

  4. Funds will be transferred automatically from the linked account. Depending on the bank, they may transfer a set amount ($100, for example), the specific amount that is overdrafted or the amount of the entire transaction. 

  5. Alternatively, some banks will cover the shortfall with their own funds, and pay themselves back the next time the customer makes a deposit. 

  6. A fee will be charged for overdraft protection; the national average in the United States is $33.47 per occurrence.

  7. The transaction will go through as normal. The merchant or payee will not be notified that the transaction resulted in an overdraft. 

In most cases, overdraft protection simply means that the bank will transfer funds from the customer's other account in order to cover a shortfall in the checking account balance. 

Some banks also issue overdraft lines of credit. In this case, the checking account is linked to a flexible line of credit, which is activated whenever a transaction results in an overdraft. If a customer then overdrafts their account by $100, the bank will issue an immediate loan for $100, which will be subject to interest charges. 

Frequently Asked Questions

Does overdraft affect credit scores?

Overdrafts do not directly affect credit score. In some cases, opting into a bank’s overdraft protection program (especially if it’s linked to a line of credit) may result in a credit inquiry, which can have a small temporary impact on credit reports. 

What types of accounts can be linked to overdraft protection?

To provide funding for overdraft protection, customers can generally link checking accounts, savings accounts, lines of credit and credit cards. Some banks require that the linked account be held at the same bank, while others allow linked accounts from other financial institutions. 

Do different banks have different terms for overdraft protection?

Yes. Each financial institution will have its own rules and regulations for overdraft protection, along with its own sets of fees, penalties, and interest charges. It’s important for customers to read the fine print before opting into an overdraft protection program.

Enabling overdraft can help prevent declined transactions on your debit card, but the tool does come with fees and fines when used. 

Another tool that can organize your accounts? Tally. The smart credit card debt payoff app that offers a low-interest line of credit and compiles all your credit card payments in one place, helping you avoid pesky late fees(1). 


(1)To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) Will be between 7.90% - 29.99% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.