What Happens With a Checking Overdraft & How Can You Avoid Charges?

Unlock financial wisdom with our guide on checking account overdrafts. Learn the cost, causes, consequences, and solutions for avoiding overdraft charges.
Written by Anna Baluch
Financial Expert
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Managing Editor
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Imagine you buy a pair of shoes with your debit card. The shoes cost more than the money you have in your checking account. Even though you walk away with your new shoes, you’ve overdrafted your account.

Rest assured, you’re not alone, as overdrafts happen frequently. Below, we’ll dive deeper into what you need to know about checking overdrafts and what you can do to avoid them in the future.

What Is an Overdraft?

An overdraft happens when you don’t have enough money in your checking account to cover a transaction but the bank or credit union allows it anyway.

A bounced check, which is a check that gets rejected because you have insufficient funds in your account, is an example of an overdraft. An overdraft may also occur when your ACH payment bounces or your debit card gets declined.

There are several reasons you might overdraft your account. Maybe a direct deposit you thought went through it’s still pending. Or perhaps you’ve made an impulse purchase without checking your account. While overdrafts can be frustrating and, in some cases, embarrassing, there are ways you can avoid them.

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The Consequences of an Overdraft

You should avoid overdrafts as much as possible. They’re not the end of the world but do come with several consequences, such as:

Fees

If you make a transaction that causes your checking account to dip below zero, your financial institution may charge you an overdraft fee. While overdraft fees vary, the average overdraft fee is $35. If you make multiple overdrafts, these fees can add up quickly.

Depending on your bank or credit union, you might be on the hook for an overdraft fee for each transaction until you restore your balance. You may also have to pay a monthly service fee for each day your account has a negative balance. Also, you may be charged a returned check fee if your check bounces.

Account Closures

An overdraft every once in a while is usually no big deal. However, if your checking account consistently has a negative balance or you don’t bring it up to date, your bank may close it.

If you’re unsure how your financial institution handles ongoing overdrafts, check the terms of your account or reach out to them directly.

Difficulty Opening New Accounts

When you apply for a new account, banks typically look at your bank account history. If they notice an involuntary closure on your history, they might hesitate to open a new account. They may also open your account but restrict it or charge expensive fees.

Debt Collection

If your bank closes your account due to excessive overdrafts, you’ll receive a notice explaining how to rectify your account. If you fail to do so, the bank may involve a third-party collection as a last resort. Your credit score may also take a hit and make it challenging for you to get new credit in the future.

What Is Overdraft Protection?

Overdraft protection is an optional service some banks and credit unions offer for customers who want to avoid overdraft fees.

The primary purpose of overdraft protection is to help you prevent rejected transactions from checks, ATMs, and debit cards because you don’t have enough money in your checking account.

Whenever there’s a shortfall, the bank or credit union will transfer funds from your linked account to cover it. You might be charged a flat monthly fee or a fee every time you use overdraft protection. Each bank and credit union has its own rules and regulations for overdraft protection.

Different Types of Overdraft Protection

Overdraft protection programs are not created equal. Here’s a brief overview of the various types of overdraft protection available.

Opt-In Overdraft Protection

Opt-in overdraft protection is the most common type of overdraft protection. If you opt for overdraft protection, your bank or credit union pays for certain overdraft transactions in exchange for a fee.

Linked Bank Account

You may be able to link another checking account or savings account so that the bank can transfer funds from it when you make an overdraft.

Even though you may still have to pay a fee for the transfer, it will likely be less than the overdraft fee. Some banks offer this transfer service at no charge.

Grace Periods

Some banks and credit unions offer grace periods. If you overdraft your account, the bank may not charge you a fee immediately. Instead, you’ll have a day or two to add money to your account and return to a positive balance. If you don’t, the financial institution will then charge you fees.

Credit Card

Your bank or credit union might allow you to link to a credit card.

When you make an overdraft, they’ll charge your credit card, so you won’t have to pay an overdraft fee. If you want to go this route, you’ll likely need a credit card from the same financial institution as your checking account.

Note that interest rates on credit cards can be high, so you should pay off any balance you rack up before the end of the month to avoid them.

Credit Line

An overdraft line of credit is another overdraft protection you may find at some banks. Once you overdraft your account, a bank will transfer funds from the credit line.

You’ll be charged interest on the overdrawn amount until you repay it. If you open a credit line and use it to protect against overdrafts, you might have to go through a hard credit check, which can lower your credit score. Also, you’ll likely face hefty annual interest charges, making this strategy expensive.

Pros and Cons of Overdraft Protection

Just like any financial product, overdraft protection comes with pros and cons you should consider, including:

Pros

  • Your transactions will go through even if you don’t have enough money in your account to cover them.
  • You’ll have funds at your disposal during emergency situations.
  • You won’t have to worry about bounced checks and other stressful financial situations that can compound with just one overdraft.
  • You may avoid costly fines and other consequences.

Cons

  • You might overspend if you know your bank or credit union will cover you.
  • You may still pay fees, including interest charges.
  • If you link an account with insufficient funds, your transactions won’t clear.
  • Your bank account may not be in good standing.

How to Get Overdraft Protection

You don’t get overdraft protection automatically. If you think you’d benefit from it, you can opt in when you open your account or later.

You don’t have to enroll in overdraft protection but your bank may decline a charge if your account doesn’t have enough funds. This can prevent a debit card transaction from going through or lead to a bounced check. You’ll likely have to pay fees and face other consequences as well.

Banks That Have Cut or Limited Overdraft Fees

Fortunately, some banks have either reduced overdraft fees or eliminated them. If you’re looking for a checking account with minimal to no overdraft fees, here are a few options to explore.

Citi

With the Citi Priority Checking account, which you can manage online or in person at a local Citi branch, you don’t have to worry about overdraft fees. Other perks of this account include:

  • A generous bonus offer
  • Waived fees
  • No foreign transaction fees on debit card purchases
  • Special deals on select financial products

Discover® Bank

The Discover online checking account doesn’t charge overdraft fees. You can earn cash back on up to $3,000 in monthly debit card purchases and get your paycheck up to two days early with direct deposit.

SoFi

There are no overdraft fees with the SoFi Money checking and savings account. This fee-friendly account is a one-stop shop because you can manage your bills, make purchases, and save money in one place. Plus, you’ll get access to SoFi member benefits, like free money webinars.

Overdraft Protection Limits

You may be tempted to open an account with free overdraft protection. However, you should understand that there are usually caveats to these types of accounts. There may be a cap on the protection, so you might have to pay overdraft fees for larger overdrafts. In addition, the lack of overdraft fees may only apply for a limited time. Be sure you understand the ins and outs of an account with free overdraft protection or you may face unwanted surprises and consequences.

Bottom Line

In a perfect world, you’d always have more than enough funds in your account and never overdraft. Since this may not be possible, it’s a good idea to familiarize yourself with checking overdrafts and overdraft protection. Then, take steps to reduce the risk of overdrafts to keep your checking account in good standing and finances in good shape.

Frequently Asked Questions About Overdrafts

Is overdraft protection required?

No, you can opt into overdraft protection or opt out of it. While it’s an option at most banks and credit unions, it’s not mandatory.

How can I avoid overdraft fees?

Set up low balance alerts to avoid overdraft fees, keep a little cushion in your account, or find a bank with free overdraft protection. Consider using prepaid debit cards to make your purchases.

What should I do when I realize my account is overdrawn?

Once you overdraft your account, avoid making future transactions. Also, replenish it with funds and reach out to your bank to see if you can get your fees waived.

About Author
Anna Baluch
Anna Baluch is a personal finance writer and expert who writes about financial topics ranging from personal and student loans to mortgages, debt relief, auto financing, and budgeting. As a contributor to MoneyRates, Anna’s insights are backed by her hands-on experience, exemplified by her achievement of paying off her mortgage in just 16 months, a journey she shared on the “Burn Your Mortgage” podcast in 2019. Her knowledge and expertise have appeared on personal finance platforms such as LendingTree, Business Insider, Credit Karma, Experian, American Express, Rocket Mortgage, U.S. News & World Report, and Policygenius. Anna is dedicated to guiding consumers toward making informed financial choices.