How Overdraft Protection Transfers Work

Overdraft protection transfers allow your transactions to go through even if you overdraw your checking account.

Margarette BurnetteJanuary 11, 2018
How Overdraft Protection Transfers Work
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An overdraft protection transfer, or simply "overdraft protection," is an opt-in bank service that lets you link your checking account to another account at your bank or credit union, typically either a savings or credit account.

When your checking balance is too low to cover a transaction, your bank automatically moves money to checking from the linked account. Some banks do this for free, while others might charge as much as $12 per transfer, if not more.

Either way, the amount is usually lower than the bank’s standard overdraft fee.

How is overdraft protection different from overdraft coverage?

Overdraft coverage is when banks use their own money to cover a transaction that would overdraw your account — and charge you a fee to do so. You have to opt in to this service, and it’s expensive: The median fee is about $34.

With overdraft coverage, banks use their own money to cover a transaction that would overdraw your account. This opt-in service is typically more expensive than overdraft protection transfers.

And there can still be more costs. If you don’t bring your account up to a positive balance, the next item you buy can trigger another overdraft fee.

» Interested in banks with consumer-friendly overdraft policies? See our article about overdraft fees by financial institution

Linking a checking or savings account for overdraft protection

When you connect a savings, money market or second checking account to your main checking, you cover any overdrafts with your own money. Fees generally range from zero to up to $12 per transfer, although some banks charge more for this service.

In addition, most financial institutions charge a savings withdrawal limit fee if you exceed six transfers per month from a savings or money market account, and an overdraft protection transfer would count against that limit. If you tend to transfer money out often, be careful.

» For a basic overview, check out our overdraft fee explainer

Linking a credit account for overdraft protection

You can also use a credit account, such as a credit card, personal line of credit or home equity line of credit, as a backup. You’ll pay interest on the transfer amount and possibly a transfer fee each time money is moved.

Linking a credit account to checking means you’ll pay interest on the overdrawn amount and possibly a transfer fee.

Your bank may send you a bill, as it would with any credit account. You’ll want to pay the amount due by the due date. Credit accounts are subject to approval, so this option isn’t guaranteed for everyone.

Word of caution

Although overdraft protection transfer services can be a low-cost alternative to bank-funded overdraft coverage, there are some things to be wary of:

  • Even with protection, you can still overdraw checking. The overdraft protection transfer service works only if you have available funds in your backup savings or credit account. If you write a check for $200, but your checking account has $10, and your backup savings account has only $100, you could still face an overdraft. The transaction could be denied, or if you authorized your bank to cover overdrafts — and your bank chooses to do so — you could be charged steep fees.

  • More than the exact overdraft amount could be transferred. Banks may transfer overdraft funds in multiples of a certain amount, such as $50. If a transaction pushes your account $8 in the red, the bank could transfer $50, not $8, from savings.

Opting into an overdraft protection transfer service can protect you from steep overdraft fees. You just don’t want to get comfortable spending more than you have on a regular basis.

These programs can help resolve the occasional overdraft, but they can’t replace healthy money habits like keeping enough cash in your checking account for everyday transactions.

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