#Banking

How overdraft protection works

Having a check bounce or your debit card declined isn’t just embarrassing. It can also have other adverse consequences. For example, a lender could assess a late fee, and an insurance company could threaten to cancel your policy.

Overdraft protection makes it possible to overdraw your checking account, so you avoid these situations. You have to opt-in for this service, either when you first sign up for the checking account or later on.

And while many people may think they’ll never actually need overdraft protection, the numbers tell another story. The CFPB estimates that consumers pay $17 billion annually in overdraft and non-sufficient fund fees.

Why you should avoid overdraft fees

In 2014, the CFPB found that the majority of debit card overdraft fees are incurred on transactions of $24 or less. Also, consumers repaid most overdrafts within three days.

To give you an idea of how insane that is, if you were to take out a $24 loan and repay it in three days, a $34 overdraft fee would represent an APR of 17,000%.

If you’re constantly overdrawing your account because of financial issues, paying the fee over and over again can make it hard to get back on your feet.

Fortunately, some banks have softened their overdraft policies, opting not to charge an overdraft fee on smaller purchases.

But if you find that you’re consistently overdrawing your account or you don’t want to have to deal with a potential overdraft fee, there are other solutions.

4 ways to eliminate overdraft fees

There are four main ways banks make is possible to avoid overdraft fees. Not all banks offer these alternatives, though, so you may need to switch to a different bank to get the flexibility you want.

1. Apply for an overdraft line of credit

Instead of charging a fee every time you overdraw your checking account, some banks offer a revolving credit line instead. You’ll typically pay an interest rate on your negative balance, but if you pay it off within a few days, you’ll pay just pennies.

The only drawback to this option is that you need decent credit to get approved. Also, the bank will run a hard credit check to determine whether you qualify, which could affect your credit score.

2. Opt-in for an automatic savings transfer

Some banks allow you to use your savings account to cover a shortfall caused by an overdraft. You have to set it up through the bank, but many banks don’t charge a fee to do it. If you don’t bring your account in the black by the end of the day, the bank will initiate the transfer.

Just keep in mind that federal laws require banks limit you to six withdrawals from any savings account each month. So, if an overdraft savings transfer pushes you beyond that limit, you may be on the hook for that fee.

3. Get a bank with no overdraft fees

Big banks aren’t likely to give up overdraft fees anytime soon, but some online-only banks are starting to eschew the charge.

Chime®, for example, doesn’t charge any overdraft⁵ or any other fees² you’ll typically find with a traditional bank.*

* Chime is a financial technology company, not a bank. Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC.
² There’s no fee for the Chime Savings Account. Cash withdrawal and Third-party fees may apply to Chime Checking Accounts. You must have a Chime Checking Account to open a Chime Savings Account.
⁵ Chime SpotMe is an optional, no fee service that requires a single deposit of $200 or more in qualifying direct deposits to the Chime Checking Account each month. All qualifying members will be allowed to overdraw their account up to $20 on debit card purchases and cash withdrawals initially, but may be later eligible for a higher limit of up to $200 or more based on member's Chime Account history, direct deposit frequency and amount, spending activity and other risk-based factors. Your limit will be displayed to you within the Chime mobile app. You will receive notice of any changes to your limit. Your limit may change at any time, at Chime's discretion. Although there are no overdraft fees, there may be out-of-network or third party fees associated with ATM transactions. SpotMe won't cover non-debit card transactions, including ACH transfers, Pay Anyone transfers, or Chime Checkbook transactions. See Terms and Conditions.

4. Connect your credit card

Some major banks that offer both deposit accounts and credit cards allow you to connect your credit card to your checking account for overdraft protection.

If you already have these types of accounts with one bank, you don’t have to apply for an overdraft line of credit or worry about issues with savings withdrawal limits. Here are a few banks that offer this feature:

• Bank of America
• U.S. Bank

Just remember, your checking account and credit card need to be from the same bank. Also, your credit card interest rate may be high, so pay off the balance before the due date to avoid interest.

Credit cards that can provide overdraft protection

If you’re thinking about using a credit card to provide overdraft protection without a fee or interest (as long as you pay it off before the due date, that is), here is a great option to consider.