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Published April 17, 2024
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What Is an Overdraft and How Does Overdraft Protection Work?

An overdraft drops your bank account balance below zero, and can result in fees and interest. Overdraft protection prevents a non-sufficient funds fee.

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What it means to overdraft your account

An overdraft fee occurs when there isn’t enough money in your chequing account to cover a transaction — as in, you tried to spend more money than you actually have. This could happen when you use an ATM, make a debit purchase at a store, write a cheque, transfer money to a different account or pay a bill by pre-authorized payment.

This situation has two possible outcomes. If you have overdraft protection, your bank will allow the transaction to go through and will lend you enough to cover it. Your account will display this amount as a negative balance, like –$20, and you’ll be charged overdraft fees and interest. If  you do not have overdraft protection, the transaction will be declined and your bank will likely charge you a non-sufficient funds fee (NSF).

NSF fee vs. overdraft fee

You’ll likely be charged an NSF or overdraft fee when you attempt to make a payment that is more than the current balance of your bank account. Which one you’ll pay depends on whether you have overdraft protection or not.

If you don’t have overdraft protection, you will likely be charged an NSF fee, which is typically between $40 and $50. An NSF is a single fee, but you’ll be charged every time you try to make a payment of more than your balance. On top of the NSF fee, you might also need to pay a late fee if your insufficient balance means you pay a bill past its due date.

If your account has overdraft protection, you’ll avoid the big NSF fees. Instead, you’ll pay an overdraft fee and overdraft interest. The fee amount depends on your bank, but typically there’s either a monthly fee for overdraft protection or a fee for going into overdraft, plus interest on the amount you’ve overdrawn.

» MORE: Common bank fees and charges to know (and avoid)

How overdraft protection works

Overdraft protection is a feature of some accounts that allows the bank to complete the transaction, even if your balance is insufficient. Because the transaction moves forward, overdraft protection allows you to avoid paying NSF fees and any late payment fees.

When you have overdraft protection, your financial institution essentially lends you the money you need to make the transaction, up to a certain amount. Your account will show a negative balance and you will pay interest on the overdrawn amount until you deposit enough money to bring your balance back to $0. The interest rate is similar to what you might pay on a credit card, about 19%-22% depending on your bank.

Some financial institutions may also offer the option to link your bank account to another financial product, like a line of credit, another bank account or even a credit card. When your chequing account doesn’t have enough money to cover a transaction, this type of overdraft protection draws funds from the other source.

Typically, there are two types of overdraft protection:

  • Monthly overdraft protection. You may pay a monthly fee whether you need to use your overdraft protection or not, no matter how many times you overdraw your account. Many banks charge $5 per month (plus interest). 
  • Pay-per-use overdraft protection. You may instead choose to pay a fee each time you require overdraft protection. These fees vary by financial institution but are often around $5 per overdraft transaction (plus interest). 

Make sure to read the fine print on your account so you know what fees you might pay for overdraft protection and what kind of protection is available.

While overdraft protection fees might seem small compared to larger NSF fees, they still add up over time. It’s in your best interest to always be aware of how much money you have in your bank account before making transactions. It’s a good idea to keep a “safety cushion” in your account to help you avoid overdraft scenarios altogether.

Frequently asked questions about overdrafts and overdraft protection

Can you go into overdraft if you have no money?

If you try to spend more money than you have in your account, you can go into overdraft. This is true whether your account has $1 or $100 in it. Your overdraft protection agreement includes a limit that the bank will lend you, which is the maximum amount that you can go into overdraft.

Is overdraft protection bad for your credit?

Overdraft protection itself isn’t bad for your credit, and it can help you avoid late or missed bill payments that could hurt your credit. 

However, being in overdraft for too long could impact your credit score. For example, if you don’t pay back the overdraft by the deadline listed in your agreement, your bank account could default, which would hurt your credit score. If you do go into overdraft, get your balance back above $0 and pay off any fees as soon as possible to prevent any unintended effects on your credit.

I went into overdraft but wasn’t charged any fees — what happened?

Some bank accounts include overdraft protection, meaning that you won’t be charged an extra fee if your account goes into the negative. This is more common with top-tier chequing accounts rather than basic accounts, but it’s a good idea to check your account agreement for details. Another potential scenario is that if you went into overdraft for a small amount, like $5, your bank may not have charged you a fee as a one-time courtesy.


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