Types of Services — Overdraft Protection

Overdraft Protection

Bouncing checks (writing checks for more money than is in your bank account) can be a costly mistake. It’s always better not to bounce checks in the first place, but if you occasionally have trouble tracking the balance in your account and have ever bounced a check, you may want to consider overdraft protection.

What does ‘overdraft’ mean?

If there is not enough money in your bank account to pay for checks, debits or ATM withdrawals you make, the account becomes “overdrawn”.

Most banks charge a fee (usually $25–$35) if you have insufficient funds for a check, debit or ATM transaction. It is sometimes called a “non-sufficient funds” or “NSF” fee. The merchant or retailer to whom you wrote the check may also charge you a fee (typically $25–$50 or more) for the bounced check, in addition to what you still owe them from the original purchase.

How does overdraft protection work?

Every bank has its own overdraft policies, so it’s important to check with your bank to understand how their policy works.

Typically, overdraft protection is a line of credit you apply for. If approved, the bank draws from your line of credit to cover your overdraft checks up to a certain limit. The checks get paid on time, but you are responsible for re-paying the amount borrowed from the line of credit, plus interest.

Overdraft protection is not a free ticket to spend more money than is in your account, but it can help reduce the typically expensive fees associated with having insufficient funds.

Benefits of overdraft protection

It is never a good idea to bounce a check. But for those (hopefully rare) times when you make a mistake and become overdrawn, having overdraft protection can help.

  • Reduces unanticipated fees associated with being overdrawn
  • Eliminates the risk of “returned check” fees from retailers
  • Ensures your checks are paid promptly

What are my rights?

Rules from the U.S. Federal Reserve give debit and ATM card users additional options regarding overdrafts. Banks, credit unions, and other financial institutions must offer you the ability to make decisions about overdraft services for transactions made with your debit or ATM cards. When making debit or ATM transactions, the following rules apply:

  • You choose. In the past, some banks automatically enrolled you in their standard overdraft services for all types of transactions when you opened an account. Under current law, your bank must first get your permission to apply these services to everyday debit card and ATM transactions before you can be charged overdraft fees. To grant this permission, you will need to respond to the notice and “opt-in” (agree) to the service.
  • Existing accounts. If you do not opt-in (agree), your bank's standard overdraft services won't apply to your everyday debit card and ATM transactions. These transactions typically will be declined when you don't have enough money in your account, but you will not be charged overdraft fees.
  • New accounts. If you open a new account your bank cannot charge you overdraft fees for everyday debit card and ATM transactions unless you opt-in to have overdraft protection on your account. If you open a new account your bank will treat you as an existing account holder: you will receive a notice about your bank's overdraft services and will need to opt-in if you’d like overdraft protection for your everyday debit card and ATM transactions.

Whatever your decision, the new overdraft rules give you flexibility. If you opt-in, you can cancel at any time. If you choose not opt-in initially, you can do so later.

The new rules do not cover checks or automatic bill payments that you may have set up for paying bills such as your mortgage, rent, or utilities. Your bank may still automatically enroll you in their standard overdraft services for these types of transactions. If you do not want your bank's standard overdraft services in these instances, talk to your bank; you may or may not have the option to cancel.

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