What’s an overdraft?
An overdraft happens when you spend more money than what’s available in your account. If an overdraft occurs, your credit union or bank may charge a fee.
What’s overdraft protection?
Overdraft protection is an optional service that credit unions and banks may offer to cover a transaction when there aren’t enough funds available in your checking account (sometimes for a fee). Overdraft protection is usually available for checks, ACH transactions, and recurring debits. If you want one-time debit card and ATM transactions covered, you’ll need to opt in.
Here’s an example of overdraft protection in action: You decided to opt into overdraft protection for one-time debit card and ATM transactions. You’re at your favorite coffee shop, but the available balance in your checking account is $11.40—and your total is $20. When your debit card is processed for this transaction, the $20 purchase is more than your available balance. Because you opted into overdraft protection, you authorized your credit union or bank to cover the purchase and charge you an overdraft fee as a result.
If overdraft protection doesn’t work for your financial situation, or if you’re having trouble managing it, you can easily opt out. Without overdraft protection, the transaction won’t go through if you use your debit card and don’t have enough funds in your account to cover the transaction.
What other options are available?
You also can link your checking account to your savings account or to a line of credit to cover overdrafts. When you make a purchase that would overdraw your account, the funds transferred from your linked account cover the difference. You may be charged an overdraft transfer fee for this service, which is typically a much smaller fee than what a returned transaction would cost.
Let’s say you’re ready to check out at the grocery store. Your checking account has an available balance of $180, but your purchase amounts to $200. If you have enough funds available in an account linked to your checking account to cover overdrafts, you’ll receive a transfer from your linked account to cover the additional $20 needed for the purchase (plus an overdraft transfer fee).
What can I do to help me avoid an overdraft fee?
Regularly monitor your account activity and set up balance alerts to warn you when your checking account dips below a certain amount so you can avoid overdrafts before they happen. Use that balance alert as a reminder to transfer money to your checking account.
What else can I do if I’m having financial problems?
Overdraft protection isn’t a one-size-fits-all solution. Talk to your credit union or bank if you’re having trouble managing your money or if you’re facing financial issues. They may be able to offer you help or other ways for you get a better grasp on your finances. You can also check out their financial education, or other budgeting tools and apps, to help you learn more about your spending habits.
