What is 'Overdraft Protection'

Overdraft protection is a line of credit that banks offer to their customers to cover their overdrafts. Overdraft protection kicks in when a customer writes a check for more than the amount in their account.

Overdraft protection is usually used as a cushion for checking accounts, but can be applied to savings accounts as well.

Also referred to as "cash reserve checking."

BREAKING DOWN 'Overdraft Protection'

Normally, an overdraft occurs when an account holder withdraws more than he has from his checking account. When this happens, the individual or business is charged an NSF fee (Non-sufficient Funds) or overdraft fee which averages $35 per transaction. For example, an individual who writes a check to his landlord for $800 to cover his rent for the month, will have the check bounced if he only has $650 in his checking account. In addition, he will be charged an overdraft fee of, say $30, for approving a debit transaction that exceeds his available funds. Not only will he be penalized by his landlord, he will now have an available balance in his account of $650 - $30 = $620.

An account holder who wishes to protect himself in the event that he runs short of funds at some time in the future, may opt for an overdraft protection. An overdraft protection is, in effect, a loan that can be automatically drawn upon if an account has insufficient funds. Following our tenant example above, if the tenant had secured an overdraft protection with his bank, he can withdraw the sum of his available balance and the overdraft limit. For example, if his overdraft is $500, the tenant can write a check for up to $650 + $500 = $1,150. The $800 check written to his landlord will clear, and he can use his debit card to withdraw an additional $350 from his checking account.

Overdraft protection comes at a price. Like every loan gotten from a bank, overdraft protection has an interest rate attached to it, which is very high. Although the bank allows its customers to avoid paying overdraft fees, it charges interest on the amount floated to them. Given that many banks charge an extended overdraft fee if a checking account has been negative for a certain period of time, interest payments made on time will usually be less expensive than an overdraft or NSF fee. It is important to note that even if an account holder has overdraft protection, some banks still charge him or her if his or her account balance falls below zero.

Banks offer overdraft protection for their customers in the range of $250 to $5,000. Depending on the bank, the account holder may be charged a one-time fee every month s/he goes into overdraft or a fixed monthly fee for continuous overdraft protection.

As an alternative to a line of credit overdraft protection, many banks allow their customers to link their bank accounts to a credit card or another account within the same bank in order to avoid overdraft charges. However, note that a credit card transfer that is used to cover overdraft is treated as a cash advance. Cash advances against a credit card have no grace periods, and incur higher interest rates and a cash advance fee, making this form of overdraft protection very expensive.

Overdraft protection is optional and not for everyone. Bank customers can opt in or out of overdraft protection for their checking or savings accounts. A customer that opts out of overdraft coverage will have debit transactions either from an ATM, POS terminal, or check, declined if the transaction amount exceeds the available funds in the account.



  1. Overdraft

    An extension of credit from a lending institution when an account ...
  2. Checking Account

    A checking account is a deposit account at a financial institution ...
  3. Overdraft Cap

    The maximum dollar limit that a bank will send to another financial ...
  4. Available Funds

    Funds that are available to an account holder for withdrawal ...
  5. Linked Transfer Account

    Accounts held by an individual at a financial institution that ...
  6. Uncommitted Facility

    An agreement between a lender and a borrower whereby the lender ...
Related Articles
  1. Personal Finance


    An overdraft occurs when money is withdrawn from a bank account in an amount that exceeds the funds available in the account. Banks often permit this as a form of short-term loan to the account ...
  2. Personal Finance

    When Good People Write Bad Checks

    Overdraft protection can help when you overestimate your balance, but it will cost you.
  3. Personal Finance

    4 Ways to Ditch Bank Overdraft Fees

    At $35 a pop, overdraft fees can mount up quickly. Here are 4 different strategies for avoiding them.
  4. Insights

    JPMorgan, BoA, Wells Fargo Draw $6.4 Bln in Fees

    Fees disproportionately impact low and moderate income families in America.
  5. Personal Finance

    The Most Costly Banking Mistakes You Can Make

    With changing and increasing fees, it can be difficult to avoid bank charges, but investing time in finding out what your bank charges, and when, can help you save money.
  6. Personal Finance

    Forget Your Bank Account - Use Your Credit Card

    What if you used your credit card as a bank account? Believe it or not, this strange strategy could actually work.
  7. Personal Finance

    The Ins And Outs Of Bank Fees

    These service charges could nickel and dime you right out of your nest egg.
  8. Personal Finance

    7 More Things Your Banker Doesn't Want You To Know

    Your banker is not your friend, and the more you know about their motives, the better you can protect your money.
  9. Managing Wealth

    6 Banking Fees You Can Avoid

    There are ways to avoid banking and credit card fees, but it takes planning, commitment and some lucky timing.
  10. Personal Finance

    Best Checking Accounts For Couples

    Being a couple, especially if you both have jobs, can help you qualify for benefits and fee waivers that would be tougher to get on just one salary.
  1. What is the difference between overdraft and cash credit?

    The primary differences between overdraft and cash credit lie in how they are secured and whether the money is lent out of ... Read Answer >>
  2. What are the pros and cons of overdraft protection?

    The good news: Checks always clear. The bad: The bank will charge you an overdraft fee, even though you’re using your own ... Read Answer >>
  3. Can a checking account go negative?

    Find out about negative checking account balances and the ramifications. There is a price to pay, but smart consumers can ... Read Answer >>
  4. How do you calculate payback period using Excel?

    Understand the various fees that can be assessed on a personal or business checking account, and learn methods to avoid being ... Read Answer >>
  5. Will using an overdraft hurt my credit score?

    Find out if overdrafting a bank account hurts a credit score, how reporting is handled and if a consumer is able to dispute ... Read Answer >>
Trading Center