FAQ: Should I enroll in Overdraft Protection? - NerdWallet
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FAQ: Should I enroll in Overdraft Protection?

Overview of Overdraft Fees

Overdraft fees are regulated by the Federal Reserve.  For a complete overview of the Overdraft Protection Law and the current state of overdraft fees, check out our post, “What is the Overdraft Protection Law, and how do overdraft fees work?”

Customers have three options regarding overdrafts:

Overdraft option What happens to the transaction? Fee
Default setting Rejected by the bank and merchant at the point of sale $0
“Overdraft Protection” Bank processes the transaction by transferring funds from a linked account $10-12
Overdraft Coverage Bank processes transaction, pays the merchant ~$35 + sustained overdraft fee if account holder hasn’t paid the bank after several days

A Pew study found that 18% of Americans overdrafted their account last year; of that 18%, 26% incurred an overdraft transfer fee as part of an overdraft protection program that they opted into.  What’s commonly referred to as “overdraft protection” is in reality an overdraft transfer fee, where banks charge a reduced rate (~$10, instead of $35) to transfer funds from the account holder’s linked account (typically, a savings account or line of credit).  There is no cost to enroll, and a fee is charged only if an overdraft occurs.

If there are not sufficient funds in the linked account, the customer is charged the standard overdraft fee. Therefore, enrolling in Overdraft Protection may still lead to high fees.

NerdWallet’s Recommendation

The Consumer Federation of America cautions against opting in to any sort of overdraft plan that charges a fee, and we agree that these fee-charging overdraft protection programs are not beneficial for most consumers.

For consumers who accidentally overdraw on rare occasions, NerdWallet recommends staying in the default setting (opting out of coverage and protection).  The convenience of avoiding a declined transaction doesn’t outweigh a fee for a $2 cup of coffee.

For customers who overdraw frequently, NerdWallet recommends staying in the default setting or switching to a credit union or internet bank.

Despite the potential costs associated with Overdraft Protection plans, some consumers may worry about being unable to access money at crucial times.  There are certain situations in which the gain outweighs the cost, such as a much-needed grocery trip or a delinquent electricity bill, and a customer may make a conscious decision to overdraw an account

Internet banks and credit unions generally charge lesser fees for overdrafting, and there are several that offer great Overdraft Protection plans that charge no fees to automatically transfer funds between a savings and checking account when the checking account is overdrawn.

  • Ally Bank transfers funds from a linked savings account for free
  • ING Direct transfers funds from a line of credit for no fee, just 11.25% interest until the customer repays the line of credit
  • Many credit unions offer no-fee Overdraft Protection as well if you link a checking and savings account, including Patelco Credit Union and the San Francisco Fire Credit Union

Overdraft Protection programs such as these are beneficial for any consumer, regardless of their financial situation.

Other Expert Opinions

Greg reiterates our point that overdraft protection does not make sense for those who do not have money in a savings account, saying, “Those lacking savings and a good credit report will have the option of the standard fee-based overdraft protection or none at all.
The best overdraft protection is the kind you don’t have to use! Use your online and mobile banking to track your balances and avoid writing bad checks or overdrafting your account with your debit card. If you don’t have the ability to get online, balance your statement monthly and utilize your check register. You will need to religiously jot down every transaction.”

“Overdraft protection is a bad idea.  It is a gateway to overdraft fees.  Overdraft fees can be as high as $35 per check. If a customer named Jane Doe  makes four transactions totaling $100 and Jane Doe has insufficient funds, the bank automatically activates the overdraft and clears all of those transactions. To make matters worse, often Jane Doe and customers like her don’t even realize that they are overdrawn and subject to all of these fees until the bank notifies them about it.

The best solution is to save yourself the fees you would have to pay and instead, slowly build up a cash cushion. That way you are keeping your hard earned money, instead of paying it in fees to your bank.”

  • Beth Coggins, Director of Public Relations at Ally Bank

“At Ally Bank, we offer overdraft alerts that warn customers when an account is overdrawn. We also allow customers to link an Interest Checking Account to their Ally Online Savings or Money Market Account, so that if they exceed your checking balance, funds are automatically transferred to cover the transaction at no charge to the customer.”

  • Holly Wolf, Chief Marketing Officer of Conestoga Bank, offers advice for consumers who do have money in a savings account that they can link to

“Fundamentally, you should never be writing checks or using your debit card if you don’t have the cash. But in the event of an error, overdraft protection is there to cover you.

We recommend overdraft protection (e.g., transferring from your savings to your checking account.) Here’s why:

1. Your bills will get paid and you avoid the fees.  For example, overdraft protection eliminates the risk that car insurance will be cancelled or the utilities shut off because the check didn’t clear, assuming you are paying at the absolute last minute.

2. The fees for transferring from savings to checking are less than the bounced check fee.

3. There are delays in posting transactions that may have impacted your balance or you forgot to record an ATM transaction-overdraft will cover that.

4. This is a smart way to avoid bank fees and still have a safety net in the unlikely event of overdrawing your account.”

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