Do You Need Overdraft Protection?

You’re 6.

You walk up to the counter at the store and plop down a bag of gummy worms and a crinkled dollar. The cashier straightens out the dollar and shakes his head. In adult terms: You have insufficient funds. If you’re lucky, a kind stranger in line will hand the cashier some change to make up the difference.

Overdraft protection kind of works the same way. It keeps your purchases from being declined when you spend more money than you have in your bank account. But banks aren’t helping you out just to be nice. They make big money on overdraft protection, so just say no to it.

Let’s walk through what overdraft protection is, why you don’t need it, and what you should do instead.

What Is Overdraft Protection?

Overdraft protection is a service banks offer to cover you when you’ve spent more money than what’s in your checking account. Think of it as a short-term loan with a fee.

Overdraft protection is supposed to protect you from overdraft fees that your bank or credit union charges you when your checking account balance dips below zero. Depending on the bank, overdraft fees may range from $20 to $40. In recent years, big banks, small community banks and even credit unions have scooped up more than $33 billion in overdraft fees.¹

Banks know that overdraft is a scary word for most people. So they created overdraft protection, which sounds like it could almost be helpful. And of course, that’s what banks are banking on—that you’ll think they’re protecting you.

But overdraft protection is as much of a scam as overdraft fees. If banks never allowed you to spend money you didn’t have (aka declining transactions at the register or ATM if your account has insufficient funds), then they wouldn’t need to charge overdraft fees. And if they didn’t charge overdraft fees, then overdraft protection wouldn’t need to exist.

Legally, banks can’t automatically enroll you in overdraft protection. But banks are so slick that more than half of people with overdraft protection don’t remember signing up for it. And 75% of people say they would rather just have their bank decline the transaction than have it go through and get charged a fee later.²

Let’s take a look at the most common types of overdraft protection.

Types of Overdraft Protection

When you have overdraft protection, you usually have to pay a fee each time your bank kicks in some money to cover a transaction that makes your account go negative.

There are two main types of overdraft protection. (And remember, your bank can’t sign you up for overdraft protection without your permission. So don’t do it!)

1. Connect your checking account to your savings account.

Connecting your checking and savings accounts isn’t a bad thing. It makes transferring funds super easy. But when it comes to connecting them for overdraft protection purposes, just say no.

Here’s how it works: First, your bank will connect your checking account to your savings account. Then, if you overdraw your checking account, your bank will automatically transfer money from your savings to your checking to make up the overdrawn difference.

You probably won’t be surprised to learn that most banks charge a fee for this service. That’s right, expect a $10 to $15 fee just for your bank to move your money from one account to the other. And here’s something else banks are counting on: If someone doesn’t have enough money in their checking account, the chances are probably pretty good they won’t have the backup funds in savings either. Cha-ching—now they can just move forward with the original overdraft fees.

2. Connect your checking account to a line of credit.

If you’re still using credit cards, banks will gladly connect your checking account to your credit card. It’s even better for them if it’s one of their credit cards! (But let’s get real here—if you’re still using credit cards, it’s time to get out the scissors and cut up those suckers once and for all!)

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When you overdraw your checking account, the amount you went over gets tacked onto your credit card balance. And yes, the bank will charge you a fee for doing this. So now, not only has your bank allowed you to spend money you don’t have, but it’s also put it on an account that’s going to charge you interest. That’s not a service you want!

The bottom line is this: You want to avoid having to choose from any of these options. If you’re overdrawing your account again and again, you’re just tossing money out the window on fees. You really need to take a look at your budgeting practices. A budget is a plan for your money, and it’s a must-have if you’re going to win with money. The more you do it, the better you get. And then you can be done with overdraft fees for good.

Your Overdraft Protection Alternative

Here’s the good news: You don’t have to get caught up in any of this overdraft protection business. When you choose a bank, whether it’s a huge corporate bank or a small-town credit union, ask about their overdraft policies. Make sure you’re clear on what the fees and penalties are. Make it even clearer that you’re not interested in overdraft protection.

When you decline overdraft protection, you’re giving your bank permission to decline transactions if you don’t have the funds to pay for them. How’s that for some good old-fashioned common sense!

But here’s an even better idea: Get a better bank. Instead of trying to understand confusing bank policies, choose a bank that wants to help you get out of debt, save money, and build the life you’ve been dreaming about.