What is overdraft protection? The pros and cons of opting out
In September of 2025, Congress blocked a rule that would have capped overdraft fees. That leaves it up to consumers to take matters into their own hands.
This is important because bank and credit union customers pay several billion dollars worth of overdraft fees annually. These fees often exceed over $30 per occurrence. Overdraft fees apply when the bank covers transactions that overdraw your account, typically if you have opted into overdraft coverage for ATM and debit card transactions.
For people who frequently overdraft their accounts and incur multiple fees, the cost can easily run into the hundreds of dollars each year.
Overdraft fees can be a serious drain on your bank account, but there are ways to plug that drain. The government has chosen not to do the job, but there are things you can do to minimize or even eliminate overdraft fees.
What is overdraft protection and how does it work?
An overdraft occurs when you try to spend more money than you have in your account. Normally, this would cause a check to bounce or a debit card payment to be declined. That could cause you embarrassment and might result in you missing important payments.
This can easily happen, especially with all the payment options consumers have today. In addition to traditional checks, consumers can draw on their checking accounts through automated payments, ATM withdrawals, debit card transactions, and ACH transactions. ACH transactions use your routing and account numbers for electronic payments, and can also result in overdrafts if there are insufficient funds in your account. Overdraft protection can help prevent transactions from being declined due to insufficient funds.
Overdraft protection can give you some leeway when you spend more than you have in your account. However, this protection comes at a cost – and that cost can be steep.
Understanding basic overdraft protection services for your checking account
So, how does overdraft protection work?
If you have basic overdraft protection, when you try to spend more than you have in your account, the bank will temporarily cover the shortfall. You’ll have to pay it back to the bank within a limited time, but in the meantime, your payment will go through.
In return, though, the bank will charge a fee. However, since 2010, federal regulations have required that customers must actively opt-in to an overdraft program in order for their bank to charge overdraft fees. Once a customer opts in, they still have the choice of opting out of the program later on. The terms and conditions of overdraft protection are outlined in your account agreement, and overdraft protection is an optional service that customers can choose to activate.
How banks determine overdraft fees
When deciding whether to choose overdraft protection, it’s important to understand the costs.
A 2024 study by the Consumer Financial Protection Bureau (CFPB) found that 18 of the 20 largest banks in the US charged overdraft fees. More than half of the banks with overdraft protection charged overdraft fees that exceeded $30 per occurrence.
When a transaction exceeds the available balance in your account, overdraft fees apply. What makes this even more costly is that banks may charge multiple overdraft fees if you have more than one transaction while your account balance remains below zero. For example, imagine running several errands in one day: picking up dry cleaning, buying a gallon of milk and a loaf of bread at a store, and filling up your car with gas.
At each stop, you pay with your debit card. However, earlier that day, an automated bill payment was processed, and your checking account was charged its monthly fee.
As a result, you no longer have enough funds in your account to cover these purchases. Consequently, your payments at the dry cleaner, the grocery store, and the gas station would each trigger separate overdraft fees. On a day when you intended to spend less than $100, overdraft fees could more than double your total expenses.
While banks often limit the number of overdraft fees charged per day, even two or three fees can quickly add up, leading to significant unexpected costs.
According to the CFPB study, here were the overdraft coverage policies of the five largest US banks at the time of the study:
Bank | Overdraft Fee | Maximum Overdraft Fees Per Day | Total Cost of Maximum Overdraft Fees Per Day |
J.P. Morgan Chase | $34 | 3 | $102 |
Bank of America | $10 | 2 | $20 |
Wells Fargo | $35 | 3 | $105 |
Citibank | None | N/A | N/A |
U.S. Bank | $36 | 3 | $108 |
The pros and cons of opting out of overdraft protection
On the surface, overdraft protection may seem like a great service. However, when you study the costs involved, you may have second thoughts.
Still, there are both pros and cons to opting out of overdraft protection. These considerations primarily apply to personal accounts, as overdraft policies may differ for business accounts.
Benefits of opting out
Opting out of overdraft coverage can have a variety of benefits:
- It can save you the cost of overdraft fees.
- It can help you avoid overdraft fees by ensuring transactions are declined when you don’t have enough funds.
- Monitoring your account closely can help prevent overdrafts and keep your finances on track.
- It can get you in the habit of keeping closer track of your bank balances and activity.
- It can prevent you from making impulse purchases.
- It can encourage you to budget more carefully so you can make sure you have money available for the things you need.
Drawbacks of opting out
Before you turn off overdraft protection, you should also consider the drawbacks:
- Not having overdraft protection could cause you to miss making important payments, like for utility bills.
- You could be caught short in emergencies, like needing gas to get home when you don’t have cash.
- Having declined transactions on your debit card could cause you embarrassment.
- Without the option of overdrafts, you could rely more on credit card borrowing, which has its own costs.
- Even if you don’t have overdraft protection, you may be charged a non-sufficient funds (NSF) fee. These fees are assessed when the bank has to decline a payment because there is not enough money to cover it.
What happens when you opt out of overdraft protection?
The following should give you more of an idea of what would happen if you did not have a checking account with overdraft protection—these outcomes could apply to your deposit account:
How transactions are handled without overdraft protection
If you do not have overdraft protection, there’s a good chance a bank will simply decline any transaction when there isn’t enough money in your account to cover it. Transactions are only approved if there are sufficient available funds in your account. If that happens, besides not being able to make the payment you’d intended, you might still encounter an NSF fee. You might also find that the party you were trying to pay will assess a late fee and/or a failed payment fee.
Some banks will cover small overdrafts for a limited time, even if you don’t have overdraft protection. However, if you don’t make up the shortfall promptly or if you have too many overdrafts, they might close your account.
Bank-specific policies on opt-out procedures
You should be able to check your account online to see if overdraft protection is activated. Online banking platforms allow you to review your account details and manage overdraft protection settings directly, making it easy to monitor and adjust your preferences. You might also be able to turn off overdraft protection online. If you can’t do it that way, call a customer service representative for help. Remember, they are required to let you opt out of overdraft protection if you choose to. Be sure to get confirmation in writing.
Here are some examples of ways to opt out of overdraft protection at some of the nation’s largest banks:
- Wells Fargo Bank lets you opt out online, by calling a national customer service number, or by talking to a representative at your local branch. You can even opt out at a Wells Fargo ATM.
- For a Bank of America account, ask a bank representative to apply the “Decline All” overdraft setting to your account.
- U.S. Bank allows you to opt in or out of overdraft coverage by logging into your account on their website or mobile app.
Alternatives to standard overdraft protection
Here are some alternatives that can help you avoid expensive overdraft fees:
Linked account transfers
At many banks, you can link a savings account at the same bank to your checking account. This arrangement will automatically transfer money to your checking account from the savings account when needed.
Before signing up, check the terms of this kind of arrangement to see if there are any fees involved when these transfers occur. Some banks may charge transfer fees or additional fees for each transfer from a linked account, which can result in unexpected extra costs. Also, keep in mind that having your checking account tap into a savings account could undermine your attempts to save money over time.
Overdraft lines of credit
An overdraft line of credit allows you to automatically borrow money when your checking account runs low.
The way it works is that you get pre-approved at your bank for a line of credit, subject to credit approval. This is a limited amount that you are eligible to borrow at any time. If you attempt a transaction for more than what’s in your checking account, money from the line of credit will automatically be transferred into your checking account to cover the shortfall.
The drawback with this arrangement is that when these transfers take place, it means you are borrowing money. You will be charged interest on the amount borrowed, and possibly a one-time fee for the transfer. Those fees might represent a large percentage of the amount you’re borrowing.
Also, automatic borrowing to cover overdrafts might make it too easy to overspend. It would be better for your budget to find ways to avoid overdrafts in the first place.
Balance alerts and monitoring tools
One way to avoid overdrafts is to take advantage of some of the tools available with modern banking. See if your bank has a mobile app that will allow you to check your balance and account activity anytime, anywhere. Mobile banking and mobile banking apps offer features such as mobile deposit and the ability to view scheduled payments, making it easier to manage your finances and avoid overdrafts. Some banks also allow you to sign up for notifications when your balance falls below a certain level.
Leeway policies
If you’re prone to overdrafts, one thing to look into when choosing a checking account is how much leeway the bank gives you before something is considered an overdraft. Leeway policies are often based on your available balance rather than your ledger balance, so it’s important to monitor your available balance through mobile or online banking to avoid overdrafts.
Technically, an overdraft occurs immediately when you spend a penny more than you have in the account. However, some banks give you a little wiggle room.
There are banks that allow you to overdraft your account by up to $50 before they charge you an overdraft fee, as long as you promptly cover the overdraft. Several banks give you until the next day to do so.
Who should opt out of overdraft protection?
So, what’s the best move for you? Do you opt in or out of overdraft protection? If you rely on automatic bill payments, need to pay bills on time, or have recurring payments such as subscriptions or memberships set up, consider how opting out of overdraft coverage could affect your ability to avoid missed or late payments.
Financial situations where opting out makes sense
Ironically, the more you use overdraft protection, the more it makes sense to opt out.
Making a habit of overdrafts is a very expensive form of safety net. Besides the direct cost of overdraft fees, there are indirect costs. Frequent overdrafts can result in costly fees, especially if you miss payments or have insufficient funds for upcoming automatic payments. Monitoring your account for upcoming automatic payments can help you avoid these charges and better manage your finances.
Overdrafting your account can undermine your efforts to budget and keep spending in line. Doing it too much could also cause your bank to close your account.
Opting out of overdraft protection may force you to find better alternatives, such as leaving a safety cushion in your account, budgeting more realistically, and monitoring your balance more closely.
When keeping overdraft protection might be better
If you rarely overdraft your account – say, less than once a year – keeping overdraft protection can work as a fairly low-cost form of insurance. Setting up direct deposit can also help ensure your account is funded in time to cover unexpected expenses, reducing the likelihood that you’ll need to use overdraft coverage. It’s something you’ll rarely use, but if something unexpected happens that causes you to overdraft your account, that protection will be there when you need it.
Frequent overdrafts are a problem that needs to be solved
Whether overdraft protection is a good idea or not depends on your banking habits. Either way, it should be a conscious choice.
Overdraft fees are too expensive for you to keep paying them regularly. Finding a way to avoid overdrafts will not only save you those fees, but it can also put your household finances on a more stable footing.
Be sure to review your deposit account agreement for specific details about overdraft coverage, including how debit card overdraft coverage works and whether it applies to recurring debit card transactions. Understanding your bank’s funds availability policy is crucial, as it determines when deposited funds become available for use and how available funds are calculated. Different types of deposit accounts, such as checking accounts and money market accounts, may have different rules regarding available funds and how the bank will cover transactions that exceed your balance. This can affect whether transactions are approved or declined and whether fees are charged, so knowing these details can help you make informed decisions about managing your accounts.
