An overdraft account lets you spend more money than you have in your account, up to a limit set by your bank
When you make a purchase or withdrawal and your account balance drops below zero, the bank covers the difference. You owe that money back to the bank, usually with a fee and interest. The overdraft limit is not information programs — it is a short-term loan that your bank extends automatically when you need it.
Not all accounts come with overdraft protection. Some banks offer it as a standard feature. Others require you to request it. A few do not offer it at all, and instead decline transactions that would overdraw your account.
Key Takeaways
- An overdraft occurs when you spend more than your account balance, and your bank covers the shortfall up to a preset limit.
- Banks charge overdraft fees (typically $25 to $35 per transaction) and may charge daily fees if your account stays negative.
- Overdraft protection can be linked to a savings account or credit line, which transfers money automatically to cover the shortfall instead of charging a fee.
- You can decline overdraft protection and have transactions rejected instead, which prevents debt but may cause checks to bounce or payments to fail.
How overdraft fees work
When a transaction pushes your account into negative territory, your bank charges an overdraft fee. This fee is separate from any interest you owe on the negative balance. Most banks charge between $25 and $35 per overdraft transaction, though the amount varies by institution.
Some banks also charge a daily fee if your account stays negative for more than one business day. This daily fee (often $5 to $15) continues until your balance goes positive again. If you overdraft multiple times in one day, you may be charged multiple overdraft fees — one per transaction — even though they all happened within hours of each other.
The fees add up quickly. Overdrafting by $50 and paying a $35 fee means you are paying 70 percent of the amount borrowed just to cover the overdraft. If your account stays negative for several days, the daily fees compound the cost.
Overdraft protection: automatic transfers instead of fees
Overdraft protection is a separate service that prevents overdraft fees by automatically transferring money from another account when your balance runs low. The most common form links your checking account to your savings account. When a transaction would overdraw checking, the bank transfers money from savings to cover it.
Some banks offer overdraft protection tied to a credit line or a money market account instead. The mechanics are the same: the bank moves money automatically so your checking balance stays positive. You do not pay an overdraft fee, but you do pay interest on the transferred amount, usually at a lower rate than the overdraft fee would cost for a single transaction.
Overdraft protection is optional. You can request it when you open an account or add it later. If you have it, you can also turn it off at any time by contacting your bank.
The difference between overdraft and overdraft protection
| Scenario | Without Overdraft Protection | With Overdraft Protection |
|---|---|---|
| Your balance is $50. You swipe your debit card for $75. | Bank charges a $35 overdraft fee. Your balance becomes -$60 (the $25 shortfall plus the fee). | Bank transfers $25 from your linked savings account. Your checking balance stays at $0 (or slightly positive, depending on the bank). You pay no overdraft fee, but may pay interest on the transfer. |
| Your balance is $50. A check for $100 clears. | Bank charges an overdraft fee. Your balance becomes -$85. If it stays negative, you pay a daily fee too. | Bank transfers $50 from savings. Your balance becomes $0. No overdraft fee. You pay interest only on what was transferred. |
| You have no overdraft protection and no linked account. | Bank declines the transaction. Your card is rejected or your check bounces. | Not applicable. |
When you might want to decline overdraft protection
Overdraft protection sounds like a safety net, but it can mask spending problems. If your account automatically covers overdrafts, you may not notice that you are spending more than you earn. The fees and interest charges are hidden until you look at your statement.
Some people prefer to have transactions declined rather than overdraft. This forces you to confront the fact that you do not have the money, which can be uncomfortable in the moment but prevents debt from accumulating. You can decline overdraft protection by telling your bank you do not want it, or by not linking a backup account.
If you decline overdraft protection, transactions that would overdraw your account will be rejected. A debit card swipe will fail at the register. A check will bounce. An automatic bill payment will not go through. This can damage your credit if bills go unpaid, but it also prevents you from going into debt for small purchases.
How to set up or change overdraft protection
If your bank offers overdraft protection, you can usually set it up online through your account settings or by calling customer service. You will need to link a backup account (usually a savings account at the same bank) or authorize a credit line.
Some banks set up overdraft protection automatically when you open a checking account. If you do not want it, you can turn it off in your account settings or by calling. Other banks require you to request it. Check your account documents or log into your online banking to see what your bank offers.
If you want to change your overdraft settings — for example, to link a different savings account or to turn protection off — contact your bank directly. The process usually takes a few minutes and takes effect when ready or within one business day.
Frequently Asked Questions
What happens if I overdraft and have no overdraft protection?
The transaction is declined. Your debit card will not work, your check will bounce, or your bill payment will fail. You will not owe the bank money, but the merchant or creditor may charge you a fee for the failed transaction.
Can I overdraft my account on purpose?
Technically yes, but it is expensive. Each overdraft costs a fee, and if your balance stays negative, you pay daily fees too. Some banks also close accounts if overdrafting becomes a pattern, so repeated overdrafts can result in losing your account.
Does overdraft protection hurt my credit score?
No. Overdraft protection is not reported to credit bureaus, so using it does not affect your credit. However, if you overdraft and the bank sends your account to collections, that can damage your credit.
Can I set a lower overdraft limit?
Most banks do not let you set your own limit, but you can decline overdraft protection entirely, which is the same as setting your limit to zero. Some banks may negotiate a lower limit if you ask, but this varies by institution.
What is the difference between overdraft and a line of credit?
An overdraft is automatic and triggered only when you spend more than your balance. A line of credit is money you borrow on purpose, usually by writing a check or making a withdrawal. Both charge interest, but a line of credit is intentional borrowing while an overdraft is accidental.