We've all been there: You have bills scheduled to automatically withdraw from your checking account, but an expected direct deposit or check has not yet arrived. Or payday is two days away but you need gas in your car now.
If you're short on funds but want to avoid the fees that go with paying your bills late or not being able to drive your vehicle, over-drafting your bank account is an option. It's not something you should do on a regular basis, but sometimes it's necessary, and there are ways you can do it without causing major damage to your bank account or your credit report.
What Is an Overdraft?
An overdraft is when you spend more money than is in your bank account, but the bank honors the payments and charges you a fee. Some banks do this automatically, while others require you to sign up for a special program that will do it for you.
What Is Overdraft Protection?
Overdraft protection is a program that many banks have put into place for people who need emergency funds. Think of it as a mini loan to yourself. If you sign up for overdraft protection, you can write a check or use your debit card for purchases that will exceed your bank account balance. The bank will honor the charge, but they charge you a fee for the service.
Many banks such as Chase automatically sign you up for overdraft protection when you open your account, and you must opt-out if you do not want it. Check with your bank to see how they handle overdrafts.
Why Have Overdraft Protection?
As BadCredit.org points out, there are pros and cons for overdraft protection. If a charge comes to your bank and you don’t have the funds to cover it, the bank will refuse the charge and charge you a bank fee. The entity that submitted the charge can also charge you a returned check or returned payment fee. Between the two, the fees could exceed $75 or more.
With overdraft protection, the bank will charge you an overdraft fee but honor the charge so you won’t be charged a returned check fee from the entity that submitted the payment. So, instead of having two fees to pay, you only have one.
Overdraft with a Check
If you're writing a check, write the check for more than your bank account balance. When the check is sent to the bank, the bank will honor it and charge you an overdraft fee if you're signed up with overdraft protection. If you're not signed up for overdraft protection, the bank might honor the check and charge you a fee, or they will return the check for nonsufficient funds. A returned check is what you're trying to avoid, so it's important to check with your bank to see if overdraft protection is an option.
Overdraft With a Debit Card
If you're using a debit card at an ATM and you’re attempting to withdraw more than what is in your account, you'll be prompted to accept that you may be charged a fee. If you accept the possibility of a fee, then you will be allowed to take out the money.
Again, some banks will allow this once or twice as a courtesy, while others require you to be signed up with overdraft protection. If this is not allowed, and you did not opt-in for overdraft protection, you will have to choose to withdraw an amount that is less than your actual bank account balance.
It cannot be stressed enough how overdrafts should be used infrequently and for emergencies only. Each time you use overdraft protection you will be charged a fee upwards of $35. The fees can add up quickly and put your bank account in the negative, so you should only use overdraft protection when absolutely necessary.
- BadCredit.Org: How to Overdraft Your Debit Card
- Chase: Overdraft Services
- Consumer Financial Protection Bureau. "A Closer Look: Overdraft and the Impact of Opting-In," Page 1. Accessed May 12, 2020.
- National Credit Union Administration. "Overdraft and Non-Sufficient Funds (NSF) Fees." Accessed May 12, 2020.
- Consumer Financial Protection Bureau. "A Closer Look: Overdraft and the Impact of Opting-In," Page 4. Accessed May 12, 2020.
- Consumer Financial Protection Bureau. "A Closer Look: Overdraft and the Impact of Opting-In," Page 2. Accessed May 12, 2020.
- Consumer Financial Protection Bureau. "You’ve Got Options When It Comes to Overdraft," Page 1. Accessed May 12, 2020.
- First Bank. "Consumer Account Overdraft Privilege Disclosure," Page 1. Accessed May 12, 2020.
- Experian. "Why Was I Denied a Checking Account?" Accessed May 12, 2020.
- Consumer Financial Protection Bureau. "You’ve Got Options When It Comes to Overdraft," Page 2. Accessed May 12, 2020.
- U.S. Government Publishing Office. "The Overdraft Protection Act of 2009." Accessed May 12, 2020.
K.A. Francis has been a freelance and small business owner for 20 years. She has been writing about personal finance and budgeting since 2008. She taught Accounting, Management, Marketing and Business Law at WV Business College and Belmont College and holds a BA and an MAED in Education and Training.