What Is Overdraft Protection and How Does it Work?

Andrew Secker, Private Banker, First Republic Bank
October 26, 2021

You may find yourself making a transaction that sends your checking account into the red. This can either happen with an unexpected charge or when you don’t realize your balance isn’t high enough to cover a transaction or a withdrawal on any given day. Because of this common occurrence, overdraft protection—a checking account feature designed to keep your balance stable—exists. 

Overdraft protection can be quite useful in ensuring payments made from accounts with insufficient funds reach the intended party while also protecting your checking account from costly overdraft fees. When selecting your deposit account, it's an important banking service to consider. 

Overdraft protection definition

Due to the fluid nature of your accounts, there may be instances where you have insufficient funds in your checking account to complete a transaction. If you spend more than your available bank account balance, this is called an overdraft.

How does overdraft protection help with this, exactly? This service provides your account with the funds you are missing while also helping you avoid fees that can be levied for overdrafts and non-sufficient funds (NSF). Some banks charge clients when they overdraw their checking account; but, with overdraft protection, that fee is reduced or is waived completely.

How does overdraft protection work?

Overdraft protection works by allowing a transaction to be successfully processed when there isn't enough money in your bank account. The way these funds are covered varies based on the type of overdraft protection a financial institution offers.

Overdraft protection is designed to prevent a transaction from being rejected, while also enabling you to avoid insufficient fund fees. Fees for overdrawing your bank account can cost more than just overdraft fees, they can also cost NSF fees.

Although NSF fees and overdraft fees are sometimes used interchangeably, they are slightly different.

  • NSF fee: A non-sufficient funds (NSF) fee is charged when you overdraw your account, and the item (check, bill pay, etc.) is returned unpaid.
  • Overdraft fees: An overdraft fee is charged when you overdraw your checking account balance into the negative, and your financial institution pays what you can’t to complete the transaction.

Banks often offer different ways to protect your account from overdrawn, each with its own advantages and disadvantages. Each overdraft type is meant to protect you from incurring costly fees associated with pulling too much money out of your account.

​​Types of overdraft protection

There are several different options banks have established for overdraft protection, each offering different benefits. As you research overdraft protection you’ll want to think about what kind of overdraft risk could (or already does) affect you.

It's also important to think about the financial relationship you have with your bank. For example, having a credit card or savings account linked to your checking account may help you avoid overdrawing your checking account. These are some of the overdraft protections services you might see offered by your bank:

Overdraft Protections Considerations
Opt-in overdraft protection
  • The customer's bank covers certain overdraft transactions below a set transaction amount set out by the bank
  • May requires the customer to pay back any costs and associated fees depending on the customer's bank
Linked deposit account
  • Links an account to another checking or saving account, pulling funds from the linked account to cover the amount withdrawn
  • This protection may incur a transfer fee depending on the customer's bank
Linked credit card
  • Links the account to a credit card for overdraft coverage by way of a cash advance
  • Customer pays interest on the balance from the transfer, as well as a cash advance fee
  • May be subject to credit approval


How to avoid overdraft fees

Naturally, avoiding fees is a priority for anyone with a bank account, whether it’s with a checking or savings account. Of course, keeping an eye on your available balance is important—however, having a backup strategy to avoid overdraft fees is critical, too. 

There are multiple ways account holders can help reduce the likelihood of overdrawing their accounts and subsequent overdraft fees.

These approaches include:

  • Turning on account alerts for email or mobile (i.e., low balance reminders and payment reminders)
  • Ensuring you keep extra money in your account to cover any unforeseen spending
  • Making a point of frequently monitoring your account's balances as well as transactions
  • Keeping track of when auto drafts (also referred to as pre-authorized debits), such as automated bill pay, will hit your account

You may find yourself limited by what your bank offers, so consider what overdraft protections matter the most to you and what banking partner can provide them effectively and research what options are available from your bank.

Do I need overdraft protection?

For many people overdraft protection is important to consider. Even with frequent monitoring and vigilance, surprise transactions can pop up and overdraw your account. This is especially the case if you use your ATM debit card often, write a lot of checks or often use an automatic online bill pay linked to your checking account.

Having protection for those moments is vital to keeping your finances safe. If you actively use your checking account, overdraft protection can be a good idea. No one wants to incur unexpected fees, especially when they’re avoidable.

First Republic Bank’s Overdraft Protection offers account owners several benefits. These include linking your checking account with another checking or statement savings account (not CDs or Passbook Savings), which can cover the amount of the transaction your checking account cannot cover. These funds are transferred automatically. Overdraft Protection also helps you avoid bounced check fees and hassles, while covering ATM card or debit card transactions.

Of course, deciding whether or not to opt into overdraft protection is an individual decision that you should make based on how you use your checking account. Consider comparing the costs of overdraft and NSF fees to see which one is least costly to you.

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