FAQ: What Is the Overdraft Protection Law and How Do Overdraft Fees Work?

Margarette BurnetteJune 17, 2019

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When customers attempt a debit card or ATM transaction but do not have enough money in their account, the bank can either process or reject the transaction. Overdraft protection rules help determine what happens, and if there are fees.

What is the overdraft protection law?

The overdraft protection law stops banks from automatically enrolling customers in overdraft coverage. The coverage allows banks to process transactions when customers have insufficient funds. Banks usually charge a fee of around $35 for each of these transactions.

In 2010, the Federal Reserve declared that by default a bank must reject transactions if an account lacks sufficient funds. However, customers can choose to change the default status and opt in to overdraft coverage, if the bank offers the service. Transactions would be approved, but the bank could charge fees.

The law only applies to transactions that are not pre-authorized, such as ATM withdrawals and debit card transactions. Pre-authorized withdrawals, such as automatic bill payments and checks, do not fall under the umbrella of the overdraft protection law and can still lead to overdraft charges.

What is the 'overdraft protection' option offered by banks?

Overdraft protection is a common bank service that links a checking account with a line of credit, savings account or credit card. The bank processes an insufficient funds transaction and transfers funds from the linked account. The account would no longer be negative, so there would not be an overdraft fee.

A customer will need to have sufficient money in their savings account or qualify for a line of credit. Some banks don't charge a fee for this service, but other institutions charge a transfer fee — often around $10 — each day a transfer is made.

How many options are there?

When it comes to overdrafts, customers generally have three choices:

  1. Opt into overdraft coverage and agree to pay an overdraft fee, usually around $35, for transactions that result in a negative account balance. If there are multiple transactions, the bank may charge multiple fees. For example, with a $35 charge, three overdrafts in one day could result in fees of $105.

  2. Opt into an overdraft protection plan that links a checking account to a backup savings account or line of credit.

  3. Chose not to opt into any overdraft program. Instead, a transaction is declined by the merchant if the account lacks sufficient funds. This is the default setting when a bank account is opened, and no fee is incurred by a rejection of the transaction.

Best banks for avoiding and limiting overdraft fees

Customers can avoid overdraft fees by choosing not to enroll in an overdraft program. Those who do opt in can lower costs by choosing a bank that allows free transfers from linked accounts. Another way to reduce fees is to choose an institution that limits the number of overdraft fees charged per day.

Here is NerdWallet's list of the best banks to avoid or reduce overdraft charges.

Simple Checking & Budgeting
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  • No overdraft program or fees

  • No monthly account fees

  • Mobile budgeting tools

Chime Spending Account
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at Chime, Deposits are FDIC Insured


  • No overdraft program or fees

  • No monthly account fees

  • Cash-back rewards program

Discover Bank Cashback Debit
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Discover Bank

  • No overdraft fee

  • Offers free overdraft protection via linked account

Capital One 360 Checking®
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Capital One 360

  • Free transfers from linked savings accounts

  • Offers overdraft line of credit

Yield Pledge® Checking
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TIAA Bank/Everbank

  • Offers free transfers from linked accounts

  • Offers an overdraft line of credit

Schwab Bank High Yield Investor Checking®
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Charles Schwab Bank

  • Free automatic transfers from linked savings and brokerage accounts

» Want to compare more banks? Read about what other banks charge for overdraft fees

Your bank may offer overdraft coverage for debit and ATM transactions, but you don't have to accept it. Overdraft protection rules let you decide the best option for your account.

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