Banking

What is Overdraft Protection?

Overdraft protection links your checking account to another account or credit line to cover transactions when your balance isn’t enough. It can save you from expensive overdraft fees. While banks may charge a fee for this transfer, it is generally much lower than a standard overdraft fee. The CFPB regulates the disclosure of these transfer fees and requires that customers consent to the linked-account arrangement.

Linking a savings account is typically the most cost-effective form of overdraft protection, as transfers avoid interest charges. Using a linked credit card or overdraft line of credit may incur transfer fees and interest on the borrowed amount, but still prevents checking transaction declines.

Quick Facts

Linked Source OptionsSavings account, credit card, or overdraft line of credit

Cost ComparisonTransfer fees are significantly cheaper than standard overdraft fees

Regulatory ProtectionsOpt-in consent required for linked credit card transfers

Transaction ImpactPrevents declined payments and check bounces

PRACTICAL EXAMPLE

A customer's checking balance is $100, and they write a check for $150. With savings-linked overdraft protection, the bank transfers $50 from their linked savings account to clear the check, charging a $5 transfer fee instead of a $35 overdraft fee.

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Learn More Key Concepts

OverdraftAn account status occurring when a transaction exceeds the available account balance, resulting in a negative balance.

Checking AccountA highly liquid transactional deposit account held at a bank, allowing for frequent deposits and immediate withdrawals.

Savings AccountAn interest-bearing deposit account held at a financial institution, designed for accumulating funds with high liquidity.

Bank StatementA periodic summary of all deposits, withdrawals, fees, and interest earned in a bank account over a set cycle.

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