What is Overdraft Protection? How to Protect Yourself From Fees Associated with Overspending

Overdraft protection can save your bacon when you get a bit too free with your debit card, but sometimes the cost is steeper than a jackrabbit’s jump. It ensures your transaction goes through, but when you see your bank statement, you might wish it hadn’t.

Overdraft protection for prepaid and debit cards is a service that covers transactions when you spend more than what’s in your account, often for a fee.

To figure out if you’re roping a good deal or being led down the primrose path, you first must get a handle on how overdraft protection works, what it’s going to cost you, and how to dodge overdrafts. And that’s the very trail we’re going to blaze in this eye-opening piece.

Knowing how overdraft protection works is just about as important as a pilot checking which way the wind’s blowing. 

If ever you find yourself in a crunch where you are spending more than you have in your account, you’ll want to understand how the bank shuffles your funds, which purchases get covered, and who’s left footing the bill.

Fees Associated with Overdrafts

If you opt in to overdraft coverage, your bank may cover any transaction that results in you exceeding your limit with no need for you to lift a finger. Or you can link another account or credit card to cover any shortfall, which means the bank will charge the leftover sum to that account.

But don’t think it’s all free and easy. Many banks slap on an overdraft fee, so while you might be covered, it could cost you a bit. The average overdraft fee is $25 to $35, although the Consumer Financial Protection Bureau has proposed a rule that would drastically lower that amount.

Fee structures can also include daily limits or an occurrence cap. But those fees can add up, especially if you don’t pay attention to how close you are to running out of funds. A few $5 purchases could put you more than $100 in the hole if your bank has to step in to pay for them. Watch those fees so you aren’t paying more than you bargained for.

Banks also may charge a transfer fee for using your linked account to prevent an overdraft. These fees are typically much less, but they aren’t always $0.

Common Situations that Lead to Overdrafts 

Situations like hefty rent payments or larger-than-usual utility bills may sneak up on you and could be a good use for overdraft protection. After all, you don’t want a visit from your landlord, or your lights turned off.

When your account balance goes lower than a snake’s belly, overdraft protection can cover those essential transactions to keep things chugging along. 

With overdraft protection, purchases, bills, ATM withdrawals, and transfers can go through, saving you from the possible hassle of a declined card at some crucial moment. That helps you avoid embarrassment and the inconveniences of bouncing payments, and things will remain smooth — but you may pay a fee. 

Let’s get a general overview of how overdraft protection works and why banks offer the coverage. Hint: it isn’t out of the kindness of their hearts. 

Linked Accounts and Coverage

Some debit card accounts let you hitch up a savings account or even a line of credit to handle overdrafts. When your balance comes up short, money from the linked account rides in like the cavalry to save your hide.

With prepaid cards, it’s a little different. You can set up direct transfers or other funding sources so that when you’re running on fumes, that extra cash rolls in to keep things from going south.

These accounts can prevent economic calamity, so it is always a good idea to have one rather than relying on overdraft protection.

How to Set Up Overdraft Protection

You can opt in to overdraft protection when you set up an account with a bank and most prepaid cards. Setting it up might be easy as pie, but the devil’s in the details. Ensure you know exactly what it entails and all of the fees involved.

You may want to link up with an external account or another source of funds to make sure you’re covering any overdrafts. If your provider allows it, you can tie a savings account or a credit line to the debit card. Should the balance hit bottom, money moves over from the backup source.

A parallel process occurs for prepaid cards — just link your funding sources to your prepaid account. Then, when your prepaid balance dries up, the funds from your other sources kick in to save the day by letting you complete a transaction.

Types of Transactions Typically Covered

Here are the kinds of transactions overdraft protection usually covers:

• Point-of-sale and most online purchases: Whether you are hunting down groceries or treating yourself to a shiny new pair of boots, overdraft protection is like the trusty ranch hand stepping in when necessary. It saves you from the embarrassment of a declined card at checkout and keeps things running smoothly. Even if your funds are skinnier than a fence post, this protection lets you get what you need without having to concern yourself with being caught short.
• Bill Payments: Are bill payments flowing from your account like a creek after a spring rain? If you run dry, overdraft protection can kick in and cover things such as rent, utilities, and other regular payments when your funds are near bone dry. With this in place, you won’t incur late fees or shut-off notices because your account is empty.
• Transfers: Transferring funds between accounts? Overdraft protection serves as a safety net to help avoid those fees and bounced transfers. Whether this is covering a card payment or sending money to another account to cover a larger expense, overdraft protection keeps things running right. It’s like insurance for those moments of need, especially if you’re moving funds to cover a considerable expense.
• ATM withdrawals: Overdraft protection may save your skin if you make an ATM withdrawal while riding on the edge of your balance. This can get you out of a jam when you are really stuck, though you’d better be careful not to make a habit of it, or fees will pop up like weeds in a garden.

Overdraft protection keeps money flowing, so you don’t get stuck without funds when you least expect it. With the right setup, purchases can go through, bills get paid, and you are not as likely to experience the embarrassing moment when your card gets declined at the checkout. 

Overdraft protection is effective so long as you stay below your coverage limit. In fact, some banks may approve transactions that exceed your coverage strictly as a convenience to good customers. 

But don’t go getting too comfy — some overdrafts may still get turned down, depending on your card provider’s practices. For example, banks may shut off overdrafts for some online or gas station purchases. You better keep an eye on those details so you aren’t caught by surprise.

Now, considering overdraft protection pros and cons is mighty important, especially when you are stretching your dollars.

Benefits

If you’re more worried about payments going through than you are about pinching pennies, overdraft protection can feel like a gift straight from heaven:

• Payment Continuity: Overdraft protection saves you from that red-faced moment of having your card declined right there at the checkout. Be it buying groceries or covering a last-minute emergency, it will keep things from coming to a grinding halt when your wallet’s emptier than a politician’s promises.
• Avoiding Merchant Fees: Overdraft protection helps avoid extra fees charged by some merchants in case of bounced payments. If your check bounces like a loose wagon wheel, you could pay more than you expected. Overdraft protection steps in and saves the day. It greases that payment like butter, so you won’t have to shell out extra just to cover charges that were missed.
• Convenience and Peace of Mind: Similar to an electric fence surrounding your property, protection against an overdraft can keep you from worrying too much. In fact, just the knowledge of it working is like insurance and allows you to put your mind at rest — unless you’re one of those people who fancies life on the edge!

Drawbacks

Overdraft protection isn’t all sunshine and fiddle tunes. There are a few thorns in this rose bush worth knowing before you jump in:

• Fees May Still Apply: That peace of mind may come at a price — overdraft fees. Each time you go into the red, the bank could stick you with a fee, and those fees can pile up quicker than a freeway in a fog.
• Encourages Overspending: Because overdraft protection is on, it can tend to get a little too easy to spend. It’s cool for a while, but eventually, you’ve got to pay the piper, and that may put you in a deeper hole than where you started.
• Interest Charges on Credit-Based Protection: If your overdraft protection draws from a line of credit, you may be charged interest if you do not reimburse the amount as soon as you get the chance. That loaned money is not free, and the longer it remains unpaid, the more those interest charges can pile up, like cordwood before winter. Be watchful, or this “protection” may cost you a great deal more than what you bargained for!

In the end, you have to weigh the good against the bad and figure out whether to hitch your wagon to this service.

If you want to avoid overdraft fees, you’ve got several ways of keeping an eye on the balance of your prepaid or debit card. 

A little foresight and some good spending habits can save your backside before trouble bites you on the rear end.

Sign Up to Receive Low-Balance Alerts

One of the handiest tricks in the book is to set yourself up with low-balance alerts. These alerts will give you a holler when your account’s looking lean, letting you tighten the purse strings before you hit rock bottom.

Thanks to mobile banking tools, you can set alerts to fire off at any amount you choose, giving you a heads-up to pull up the bucket before the well runs dry.

Thanks to rapid mobile updates, you can get your balance in a jiffy, staying in the know regarding every penny coming in and leaving your account.

With that kind of up-to-the-minute smarts, you’ll be way ahead in the game of overdraft dodgeball.

Build an Emergency Fund

Another fine way to keep overdrafts at bay is by stashing a bit of extra cash in a savings account (or under the mattress) for emergencies. 

Even a small reserve may help you when life throws a curveball and you’re about to dip into the red.

You can start small; even ten or twenty bucks from each paycheck can add up faster than corn in July.

In no time, you’ll have yourself a handsome cushion that’ll give you peace of mind when your accounts are looking thin.

Opt-Out of Overdraft Protection

You can opt out of overdraft protection if you’re itching to avoid fees in the first place. Remember, if your balance isn’t big enough to cover a transaction immediately, the card gets declined, saving you from those pesky overdraft charges. 

Sure, it’s a bit disappointing to see a declined purchase, but it’s a surefire way to keep from spending more than you’ve got. Monitor your balance to avoid any surprises. 

Some cards offer a “purchase cushion” that allows you to overspend just a tad with no fees. That’s like having a little grace money when you’re running on empty. 

While you may have to deal with declined transactions from time to time, at least you will not have to wrestle with loads of fees. 

Overdraft protection can be a real, trusty safety net, catching you when you spend too much on your debit or prepaid card. It saves you from the red-faced shame of a declined card, keeping your purchases going even when your balance is crying “Uncle!”

Now, some accounts charge a flat monthly fee for overdraft protection — but it’s less common than per-transaction fees. Instead of taking a bite every time you overdraw, some banks will wrangle a flat monthly payment from your wallet for protection from overdrafts, whether you use it or not. It’s a pay-as-you-go guarantee — you pay every month, even if you manage to keep from overdrawing your account.

But, before hitching your wagon to a plan like that, you’d better check the fine print. If you don’t overdraw all that often, you may feel like you’re feeding a chicken that no longer lays eggs — you can keep her as a pet, but too many old hens can start costing you a pretty penny!

So, don’t get too comfortable with overdraft protection. Those fees have a way of nibbling at your money like a hungry goat at hay baling time.

Overdraft protection can protect your backside in a pinch, but isn’t always needed, especially if you closely monitor your balance. Remember that this safety net isn’t free, and only you can decide whether to jump on (or off) the bandwagon.