What is overdraft protection?

Overdraft protection is a service offered by some banks that allows account holders to link two accounts—such as checking, savings, or money market accounts—to help avoid overdraft fees and declined transactions.

Jim Wang knows firsthand how helpful overdraft protection can be. When he withdrew more money from his checking account than he had – an overdraft – it was a one-off expense that did it.

Back in 2016, Wang and a group of friends planned a vacation to Deep Creek Lake, Maryland. Wang agreed to book the vacation home on his credit card, and his friends agreed to contribute money to the total cost.

“It was a perfect storm because I set my credit card to autopay in full, which draws from my main checking account,” he says. “Since all the payments from my friends went to another bank, I didn’t have enough in checking to pay for it. Boom, overdraft.”

But because Wang had enrolled in his bank’s overdraft protection service, his checking account wasn’t overdrawn. His bank simply transferred the required funds from his savings account to his checking account.

Still, he says, “It was a good reminder that it’s always those weird scenarios that get us.”

So, what is overdraft protection, and how does overdraft protection work?

Wang, who is the founder of a personal finance blog, offers insights on the risks associated with overdrawing your account and why you should consider enrolling in your bank’s overdraft protection service.

What is an overdraft?

“An overdraft is when you don’t have enough money in your bank account to cover a transaction you’ve authorized,” Wang says. “This can be a debit charge or a check or even a bank transfer. When you overdraw your account, you may be charged a fee by your bank until you bring your balance up above zero.” He notes that overdraft fees charged by some banks can really sting.

But different banks handle overdrafts in different ways. Some cover the transaction and charge the customer a fee, while others simply decline the transaction. Federal law requires banks to disclose their policies on overdrafts.

Does an overdraft affect my credit score?

If you’re concerned about some of the risks of overdrawing your checking account, you might wonder, “Does an overdraft affect my credit score?”

Not directly, according to Wang.

“[Overdrafts] aren’t reported to credit bureaus, but it could be a sign of a bigger spending or money management problem,” he says. “If you overdraft your account and don’t pay back the debt, it could be sent to collections, and that could have a significant negative impact on your credit score.”

How much can I overdraft my checking account?

When you enroll in overdraft protection, how much you can overdraft your checking account depends on your bank.

Wang recommends taking a good look at your deposit agreement to see how your bank handles overdrafts. “If a bank charges an overdraft fee, they may not charge you a fee if you overdraw by less than $5,” he says. “Some will charge you even if you are $1 over. It depends on the bank, so read the fine print on your account to be sure.”

Some banks also charge you a separate fee for each transaction where you are overdrawn. For instance, if you didn’t know your bank account was below zero and you made three purchases, you could be hit with three overdraft fees.

What is an overdraft fee?

An overdraft fee is the fee your bank charges when you overdraw your account, says Wang.

Overdraft fees can vary from bank to bank. According to NerdWallet, banks typically charge their customers a $30 to $35 overdraft fee for overdrawing their account. If you’ve made multiple transactions and your bank account has insufficient funds to cover them, your bank could charge you an overdraft fee for each transaction—and that can add up fast.

But some banks either decline the purchase or revert to overdraft protection so that customers avoid any overdraft fees. Discover^®, for instance, does not charge fees for returned items and has no overdraft fees.  

What is overdraft protection? 

Overdraft protection allows account holders to link two accounts—such as checking, savings, or money market accounts. So if, for example, a customer’s checking account is overdrawn, the money in the linked account can be automatically accessed by the bank to cover the transaction.  

If you’re looking for a way to prevent overdraft fees and avoid declined transactions, enroll in your bank’s overdraft protection service. Wang highly recommends overdraft protection if your bank offers it. But keep in mind that it’s not an automatic benefit; you must opt into it.

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How does overdraft protection work? 

“With overdraft protection, you significantly reduce the chance you’ll overdraw your protected account,” Wang explains. “For example, when you opt in, you can choose your savings account to protect your checking account. If you overdraw your checking account, the bank will automatically transfer funds from your savings account into your checking account so it is no longer overdrawn.”

The only caveat is that you need to make sure that your savings account or other linked account has enough funds to cover any overdrafts.

How Discover Overdraft Services work

With Discover Overdraft Protection Transfer, we’ll automatically transfer available funds from a linked Discover account when your account is overdrawn – with no fees. That means you can link two of your accounts, whether those are checking, savings, or money market accounts. That way, if you accidentally overdraw your protected account, Discover has your back and automatically transfers funds from your designated account to cover the overdrawn amount. Opting into an overdraft solution service like the one offered by Discover helps you avoid the inconvenience of returned transactions.

Discover Overdraft Protection covers ACH and check transactions, including online bill pay, all for no fee. (ACH stands for “automated clearing house.” The ACH network facilitates money transfers between banks. It’s commonly used for automated bill payments.) However, Discover Overdraft Protection doesn’t cover certain transactions such as debit card or ATM transactions, cash back at store checkout, money transfers initiated at Discover, wire transfers, and Zelle^® transactions.

Discover customers who don’t enroll in either Discover Overdraft Protection can still enjoy peace of mind knowing that Discover will help them avoid the inconvenience of a declined transaction by alerting them any time their account balance is not enough to cover an ACH or check transaction that the customer has authorized.

As a reminder, Discover does not charge account fees, including insufficient fund or returned item fees.

Stay proactive to avoid overdraft fees and protect your account

To avoid overdraft fees, make sure you’re wisely managing your checking account.

“Keep good records of your bank balance and avoid large, irregular transactions that could potentially bring your balance below zero,” Wang says.

He also highly recommends creating a budget if you don’t already have one. Starting and maintaining a budget will give you a better understanding of the money coming into and going out of your bank account. A budget can help you manage irregular expenses like home improvements, vacations, and car maintenance that may be more likely to result in overdrafts.

“Do whatever you can to avoid [overdraft fees],” Wang says. “It feels horrible to pay $30 to $40 when it could be avoided. And get overdraft protection if it’s offered for free!”

With a Discover online checking account, you can get all the overdraft coverage with none of the fees. Learn more about how our overdraft solutions work for you.

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