What Is Overdraft Protection? Should I Have It?

Most banks offer overdraft protection to help their customers avoid overdrafting their accounts. Here is everything you need to know about these programs.

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Adam Moelis
May 13, 2022
8 min read

Having a bank account is extremely common in the United States. According to a 2019 survey, 94.6% of American households were “banked.” In other words, at least one person in roughly 19 in 20 households either had an open checking or savings account. 

Every major bank and credit union will offer a variety of benefits to their customers. For example, most financial institutions will pay you an interest rate between 0.01% and 0.03% annually. While you can easily find higher interest rates than that, the goal is for you to keep your money deposited with them instead of the competition.  

In recent years, it’s becoming more common for banks to offer an overdraft protection feature for their customers. Since this feature is relatively new, there is a lot of confusion about what exactly overdraft protection does for you.

What Is Overdraft Protection?

Overdraft protection is a banking feature that prevents any transaction that would cause your account balance to fall below zero. Having insufficient funds in your account to cover a transaction will usually trigger an overdraft fee. The transaction is returned unpaid and is commonly known as “bouncing.” 

It’s common for a bank to charge you a fee of at least $30. It’s possible for the merchant to also charge you for the failed transaction. Overdraft protection is intended to help you avoid these fees and complications.

How Does Overdraft Protection Work?

The majority of overdraft protection features work by linking your checking account to another account. If you don’t have enough money in your checking account, the funds are instead taken from your savings account, credit card, or another credit line. The original transaction would be canceled, and a separate one would be created.

For example, let’s say that you wrote a check of $1,000 to cover your monthly rent and only had $850 in your checking account. Normally, this would mean that your check bounced. You’d be charged an overdraft fee by your bank, and your rent payment would still be due. 

With overdraft protection, the $850 would stay in your checking account, and the $1,000 would be transferred from your linked account.

Does Overdraft Protection Cost Anything?

There is no charge for opting into the overdraft protection program, and it’s free to stay in it. As overdraft protection becomes more common, it’s possible to find banks that will transfer your money for free. However, the vast majority of banks will typically charge you each time you use overdraft protection.

The exact amount can vary, but you can expect a fee of around $10 to $12 per transfer. While a $12 fee might not be ideal, it's much better than the $35 alternative. Plus, you won’t have to worry about any potential issues stemming from the third party not receiving their funds.

Can an Overdraft Affect Your Credit Score?

Overdrafting on your checking account doesn’t usually affect your credit score. Since checking accounts don’t deal directly with borrowing money, any issues with them won’t be reported to any credit bureau. However, the bank can send your account to collections if you fail to pay the overdraft fees or cover the overdrawn amount. In this scenario, your credit score could end up taking a significant hit.

Should You Opt Into an Overdraft Protection Program?

There was a time when banks and financial institutions would automatically enroll their customers in their overdraft protection programs. If you wanted to leave the program, you would need to contact the bank and specifically request to end the coverage. 

All of that changed in 2010 when a new law was created. The way that it works now is that you’ll need to affirmatively opt in to the program that’s offered by your bank.

Overdraft protection can be a very helpful feature to have in certain situations. The best-case scenario is that you’ll never use it. However, it’s much better to have it and not need it than need it and not have it. 

Besides, the feature is usually offered for free and only comes with a charge when you use it. There’s no harm in opting in and keeping your account safe from an overdraft.

What Are the Alternatives to Overdraft Protection?

It’s perfectly fine if you’d prefer not to have overdraft protection. There are plenty of people that end up accidentally overdrafting because they rely on the protection program. If you don’t want to opt in to an overdraft protection program, here are a few alternatives that can keep you safe:

Stick to a Budget

Creating a budget is a great way to save up money, but it can also help you prevent overdrafting. There are also tons of apps available that can help you create a budget and track your spending. Having more money in your checking account will make it less likely that you’ll overdraft. 

The key to creating an effective budget is to list all of your monthly expenses. You’ll need to separate them into two different categories: essentials (“needs”) and variables (“wants”). 

There are some expenses that you’ll have to pay each month, such as housing, food, and transportation. However, cutting down on your variable expenses such as eating out, going to the movies, and buying new clothes can help you save money.

Avoid Automatic Payments

One of the quickest ways to overdraft your account is to establish automatic payments and transfers. These programs are very helpful for making sure that you pay your bills on time and don’t forget payments. 

However, they can be very risky if you are often close to a negative balance after the payments are taken out. You should only establish automatic payments if you can comfortably cover your bills.

Bank Account Alerts

The majority of banks now offer alerts that help you monitor your account balance. You’ll be able to receive texts or emails that indicate when your funds are getting low, transfers over a certain amount occur, or a suspicious transaction has occurred. 

These alerts can help you to identify when you’re at risk of overdrafting so that you aren’t caught off guard by insufficient funds.

Use Cash

Cash is much less convenient than using plastic, but it’s also much safer. It’s impossible to overdraft your account if you are paying with cash. If you don’t have enough cash to pay for something, then you simply can’t buy it. Using cash isn’t an option for large bills like rent, car loans, or most of your bills. However, it can help you be more careful whenever you are going shopping or out for dinner and drinks.

How Can Yotta Help?

Yotta is a bank account option that operates in the same way as your current financial institution of choice. With Yotta, you’ll be given a debit card that comes with zero-liability protection, access to more than 55,000 ATMs, and the ability to use Apple and Google pay services. What makes Yotta so special is the way that it pays out interest.

As mentioned earlier, most banks offer you a small amount of interest to entice you to keep your money deposited. The problem is that these rates are so low that it typically only amounts to a free cup of coffee at the end of the year. Yotta has a system that can pay out significantly more than a cup of coffee.

The way that it works is actually pretty simple. You'll be given one ticket for every $25 in your account at the beginning of the week. So an account balance of $100 would get you four tickets, $250 would get you ten tickets, $500 would get you 20 tickets, and so on. 

During the week, there will be a nightly number drawing at 9 PM EST. A total of seven numbers will be drawn, with the last one considered the Yotta Ball. 

Depending on how many numbers match your tickets, you could end up winning some big-time prizes. Matching six numbers without the Yotta Ball will land you a brand new Tesla Model 3. 

Matching six numbers and the Yotta Ball will net you a $10 million cash prize. A jackpot that big will mean you might not ever worry about overdrafting again. 

The Takeaway

Overdraft protection is a program that can help to prevent you from accidentally spending more money than you have in your account. Anytime that you overdraft, you’ll be charged a fee from your bank and can face an additional fee from the merchant. 

The overdraft protection will simply use funds in another account to cover the transaction. There might be a transfer fee, but it will be much less than an overdraft fee. 

If you want this additional protection, you’ll have to specifically opt in to your bank’s program. If you don’t want it, then you’ll need to be extra careful to avoid overdrafting. Creating a budget, canceling automatic payments, signing up for alerts, and using cash are a few ways to help you avoid overdrafting. 

Alternatively, you can sign up with Yotta and enjoy most of the same benefits as your current bank. The key difference is that you’ll have the chance of winning a brand new Tesla or a $10 million cash prize. With money like that, overdrafting your bank account will be the least of your worries. 

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