Checks and other debit transactions clear when you sign up for overdraft protection, even if your account lacks sufficient funds. In exchange for this service, your bank may charge hefty overdraft fees. Is this protection worth having? Here is a look at the pros and cons.

  • With overdraft protection, if you don’t have enough money in your checking account, checks will clear and ATM and debit card transactions will still go through.
  • If you don’t have enough overdraft protection to cover a shortfall, transactions won’t go through, and fees may be high.
  • Be sure to read the fine print before signing up for overdraft protection, as fees and terms vary from one bank to another.

Pros and Cons of Overdraft Protection

When you sign up for overdraft protection, your bank will use a linked backup source that you designate—a savings account, credit card, or line of credit—to pay for transactions whenever the checking account lacks the needed funds.

Pro: Your transaction will happen

Even if you don’t have enough money in your checking account, the check will clear, the ATM will give you cash, or the debit card transaction will go through. No more bounced checks, with the inconvenience and embarrassment that can come with them.

Con: You will pay fees and interest

One downside is that the bank will charge an overdraft transfer fee even if your own money is covering the shortfall. In the case of an overdraft line of credit, you’ll pay interest on the amount you borrow until you pay it back. Consumers who opt in to overdraft protection pay more in overdraft fees than those who choose not to, according to the Consumer Financial Protection Bureau (CFPB).

Con: Transactions may not clear if your backup source is low or empty

Another disadvantage: Your transactions still won’t clear if you don’t have enough money in the linked account to cover the shortfall. It might not be a big deal to have a transaction declined, but in an emergency it’s nice to have a source of backup funds. However, if your backup funding source is tapped out as well, you still won’t be able to complete the transaction.

What’s more, if you know you can’t rely on overdraft protection in an emergency, you have to carry extra cash or a credit card, just in case. Paying cash for emergencies is your least expensive option. Using a credit card could be more or less expensive than overdraft protection, depending on the agreement and conditions.

The simplest and least expensive way of having overdraft protection is to link your checking account to your savings account, thus covering your overdraft with your own funds.

What Happens When You Don't Have Overdraft Protection

Without overdraft protection, your bank can still charge a non-sufficient funds (NSF) fee that can be comparable to an overdraft fee if there isn’t enough money in your account to cover the debit. In addition, the party receiving the bad check can demand reimbursement for the returned check fee and report you to ChexSystems, which is like a credit report for your banking history. 

As of September 2019, the typical overdraft fee was $35 per item, according to a NerdWallet.com study. These fees can add up quickly if you make several transactions before you realize your account is in the red. If you are making a small purchase—or if you have another source of funds—don’t write a check or use your debit card if you’re even a little unsure whether your funds will cover the purchase.

Terms and conditions for overdraft fees vary significantly from one bank to another. If your bank’s overdraft fees are high, you may find it less expensive to pay using a credit card. This is different from linking your overdraft protection directly to a credit card, which can be pricey, because the credit card treats the linked transaction as a cash advance with a high interest rate and no grace period.

Other Ways to Avoid Overdraft Fees

While it may be worth opting in if you don’t want transactions to be declined, a better choice is to sign up for email or text alerts to flag low checking account balances, so you can avoid overdraft fees altogether. These alerts will give you an opportunity to add funds to your checking account, wait to make a purchase, or use an alternate form of payment.

You can also avoid overdraft charges with some banks’ free overdraft transfer services, which will automatically transfer money in preset increments (such as $100) from a linked savings account into your checking account when the balance is low.