When customers attempt a debit card or ATM transaction but don’t have enough money in their account, the bank can either process or reject the overdrawing transaction. Overdraft fee laws help determine which of those two things happens, and if the bank can charge you fees.
Below, you’ll find an explanation of the laws governing how banks can run overdraft coverage programs as well as answers to common questions about how overdraft fees work and overdraft protection rules.
Failed rule change for overdraft fees
The Consumer Financial Protection Bureau proposed a rule in early 2024 to mitigate excessive overdraft fees. This rule was part of President Joe Biden’s government initiative to reduce the number of so-called junk fees — hidden fees attached to goods and services — that consumers may face. Under the proposed rule, banks that have overdraft lines of credit would be required to comply with lending laws, including clear disclosures about interest rates. The rule would have lowered the maximum amount for overdraft fees, which in recent years have been as high as $30 or more per overdraft.
The rule was overturned by Congress through the Congressional Review Act, which President Donald Trump signed into law in early 2025.
Are overdraft fees legal?
It is legal for financial institutions to charge overdraft fees when there isn’t enough money in a bank account to cover a transaction. However, some transactions (such as those using a debit card) require that the account holder has opted into overdraft coverage before they can be charged. If the account holder doesn’t opt in to overdraft coverage (i.e., agree to pay overdraft fees for certain transactions), the financial institution cannot legally charge overdraft fees for those transactions. Instead, the institution would decline the transaction.
» Don’t miss: How to avoid overdraft fees
What is the overdraft protection law?
The overdraft protection law stops banks from automatically enrolling customers in overdraft coverage.
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 lead to overdraft charges (also called a nonsufficient fund fee, insufficient fund fee or NSF fee).
In 2010, the Federal Reserve declared that by default, a bank must reject debit card and ATM transactions if an account lacks sufficient funds. However, customers can opt in to overdraft coverage if their bank offers the service. If a customer opts in, their transactions would be approved, but the bank could charge fees.
» Learn more about the average overdraft fee
What was the Overdraft Protection Act of 2021?
The Overdraft Protection Act of 2021 was a proposed bill that made it illegal for banks to be deceptive or unfair about their overdraft coverage. Banks would’ve been required to provide information about overdraft coverage fees, whether a transaction could be declined if there are insufficient funds, and whether a fee will be charged for a declined transaction. The bill would’ve prohibited a bank from reporting negative information to reporting agencies about consumers’ use of overdraft coverage. But the bill didn’t leave committee or become law.
What else you need to know about overdrafts
Is overdraft coverage required?
Overdraft coverage is optional. Your bank may offer overdraft coverage for debit and ATM transactions, but you don't have to accept it. If you don’t opt in to overdraft coverage, ATM and debit card transactions will be declined by your bank if there's not enough money in your account to cover them, and you won’t be charged a fee.
What is 'overdraft coverage' vs. 'overdraft protection'?
Overdraft coverage allows banks to cover transactions when customers have insufficient funds. Banks can charge fee of $30-$35 for each of these transactions. But recently, an increasing number of institutions have reduced or eliminated overdraft fees.
Overdraft protection is a bank service that links a checking account with a line of credit, savings account or credit card to prevent an overdraft. If you opt in to an overdraft protection program, you give the bank permission to process an insufficient funds transaction and transfer funds from the linked account into your checking account to pay for the transaction. The account wouldn’t go negative, so there wouldn’t be a standard overdraft fee. But that doesn’t mean that this scenario would be free.
While fewer and fewer banks charge a fee for this transfer service, some institutions still do — often around $10 each day a transfer is made. For overdraft protection to work, you need sufficient money in your savings account or qualify for a line of credit.
How many overdraft options are there?
Customers generally have three choices when it comes to overdrafts:
- Opt in to overdraft coverage and agree to pay an overdraft fee. Overdraft fees, some as high as $30-$35, are 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 fee, three overdrafts in one day could result in fees that total $105.
- Opt in to an overdraft protection plan. With this option, you are opting in to overdraft coverage and also opting in to overdraft protection, which links your checking account to a backup savings account, credit card or line of credit. For transactions that would overdraw the checking account, the bank will transfer money from the backup account or line of credit to the checking account to prevent an overdraft. You might have to pay for overdraft protection transfers; some banks and credit unions charge for these transfers, but some don’t. Some financial institutions also offer an overdraft buffer, which means you can overdraft up to a certain amount without being charged a fee. You might have to take extra steps to qualify for this kind of feature, but it can be handy in a pinch.
- Choose to opt out of all overdraft programs. This is the default setting when a bank account is opened. With this option, if the account lacks sufficient funds, debit card transactions are declined by the merchant and ATM withdrawals are declined by the institution. No fee is incurred by these rejections. If a bank does pay for these kinds of transactions and your account is overdrawn as a result, it can’t charge you an overdraft fee. Keep in mind, however, that if you’ve set up an automated transaction — like a bill payment or a check — it might not be possible to opt out of those overdrafts, so you may be subject to a fee if it happens.
» MORE: the best banks for overdrafts
Why do banks charge overdraft fees?
Financial institutions charge overdraft fees for the service of paying for a transaction that costs more than the amount of funds available in an account; in other words, the bank is loaning you money without charging interest. Sometimes an overdraft fee is called a “courtesy pay” fee.
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