What is overdraft protection?

Overdraft protection is a service offered by some banks that allows you to connect two accounts to help avoid overdraft fees and declined transactions. Those may be checking, savings or money market accounts, for example.

Jim Wang, founder of a personal finance blog, knows firsthand how helpful overdraft protection can be. When he withdrew more money from his checking account than he had available, it was a one-time purchase that taught him about the importance of overdraft protection.

In 2016, Wang and a group of friends planned a trip. He agreed to book the vacation home on his credit card, and his friends agreed to split the total cost.

“It was a perfect storm. I set my credit card to autopay in full, which draws from my main checking account,” Wang says. “Since all the payments from my friends went to another bank, I didn’t have enough in checking to pay for it. Boom, overdraft.”

But because Wang had enrolled in his bank’s overdraft protection service, his checking account wasn’t overdrawn, meaning he never dropped below a zero dollar balance. His bank simply moved the needed funds from his savings account to his checking account.

Still, it served as a good lesson. “It was a good reminder that it’s always those weird scenarios that get us,” he says.

So, what is overdraft protection? And how does overdraft protection work?

In our guide, “What is overdraft protection?” Wang shares insights on the risks of overdrawing your account. He also explains how overdraft protection works and how it can help you avoid fees or declined transactions. And he shares why enrolling in your bank’s service may be worth thinking about.

“An overdraft is when you don’t have enough money in your bank account to cover a transaction you’ve authorized,” Wang says. “This can be a debit charge or a check or even a bank transfer. When you overdraw your account, you may be charged a fee until you bring your balance up above zero.” 

But different banks handle overdrafts in different ways. Some cover the transaction and charge the customer a fee. Others simply decline the transaction. Federal law requires banks to inform customers of their policies on overdrafts.

If you’re concerned about some of the risks of overdrawing your checking account, you might wonder, “Does an overdraft affect my credit score?”

Not directly, according to Wang. Overdrafts aren’t reported to credit bureaus, but they may be reported to other agencies. “However, it could be a sign of a bigger spending or money management problem,” he adds. “If you overdraft your account and don’t pay back the debt, it could be sent to collections. And that could have a negative impact on your credit score.”

There’s no single answer. When you enroll in overdraft protection, how much you can overdraft your checking account depends on your bank.

Wang recommends looking into how your bank handles overdrafts. “If a bank charges an overdraft fee, they may not charge you a fee if you overdraw by less than $5,” he says. “Some will charge you even if you are $1 over. It depends on the bank, so read the fine print on your account to be sure.”

Some banks also charge a separate fee for each transaction where you’re overdrawn. For example, you might not realize your account balance has fallen below zero and make three separate purchases. Your bank could charge you an overdraft fee for each transaction.

The definition is simple. An overdraft fee is the amount your bank charges when you overdraw your account.

Overdraft fees vary by bank. For banks that charge overdraft fees, the average amount is $27, according to NerdWallet. If your account doesn’t have enough money to cover multiple transactions, some banks may charge an overdraft fee for each one. That means costs can add up quickly.

Some banks simply decline the transaction instead. Others use overdraft protection, if you’ve enrolled, to help you avoid overdraft fees.

Does your checking account charge overdraft fees? Capital One 360 Checking doesn’t, helping you hold on to more of your money.

“With overdraft protection, you greatly reduce the chance you’ll overdraw your protected account,” Wang explains. “When you opt in, you can choose your savings account to protect your checking account. If you overdraw your checking account, the bank will automatically transfer funds from your savings account into your checking account so it’s no longer overdrawn.”

You’ll need to make sure your savings account or other connected account has enough funds to cover any overdrafts. Otherwise, overdraft protection may not be able to cover the transaction.

To avoid overdraft fees, make sure you’re smart about managing your checking account.

“Always keep good records of your bank balance. And avoid large, irregular transactions that could potentially bring your balance below zero,” Wang says.

He also recommends creating a budget if you don’t have one. This will give you a better understanding of the money coming into and going out of your bank account. A budget can also help you manage occasional expenses that may be more likely to result in overdrafts, like home improvements, vacations or car repairs.

Do whatever you can to avoid overdraft fees, Wang says. “It feels horrible to pay $30 to $40 when it could be avoided. And get overdraft protection if it’s offered for free.”

Overdraft protection can provide extra peace of mind by helping cover eligible transactions when your checking account balance comes up short. Every bank handles overdrafts differently. Understanding your bank’s policies and any fees it charges can help you choose the approach that works best for your finances.

• Overdraft protection can automatically transfer money from a linked account to help cover transactions that would otherwise cause your balance to go negative.

• Overdraft policies vary by bank. Reviewing your account terms can help you understand any potential fees.

• Review your account balance regularly to help avoid overdrafts. Pair that with a plan for unexpected expenses, and you should be better prepared when surprises come up.

Banking should be on your side. That’s why Capital One has removed overdraft fees on the 360 Checking account to help you keep your hard-earned cash where it belongs.