Overdraft protection is a service offered by most banks that helps prevent transactions from being declined due to insufficient funds. If you make a purchase or withdrawal that exceeds your account balance, overdraft protection will automatically transfer funds from a linked account. Types of linked accounts include savings accounts, credit cards or lines of credit. Overdraft protection is optional, so you don’t have to enroll if you don’t want to or don’t have an account to link.
How does overdraft protection work?
Overdraft protection is designed to automatically transfer funds from a linked account to cover transactions that would otherwise exceed your available balance. This way, if you do withdraw more money than you currently have in your checking account, the transaction will still clear.
There are a few common methods of overdraft protection:
- Linked bank accounts: Funds will be automatically transferred from a linked bank account, such as a savings account, into your checking account if you overdraft.
- Linked credit card or line of credit: Some banks allow you to link your checking account to your credit card or a line of credit for overdraft protection.
All the above methods can come with or without fees.
Exactly how overdraft protection works can vary depending on your account settings and linked accounts. However, it generally looks like this. Let's say you have the following account details:
- Current account balance: $100
- Overdraft limit: $500
- Potential purchase: $260
In this scenario, you attempt to make a purchase of $260. However, your available funds are $100, which is less than the transaction amount.
In this case, let’s say you’ve linked your savings account for overdraft protection. Since the transaction amount does not exceed the overdraft limit of $500, the transfer will most likely be approved, and your purchase completed. You’ll be charged a fee if your bank charges one.
