You’re opening a checking account at the bank, signing and initialling. You get to the overdraft protection page—would you like to opt in? The banker likely tells you it’s in your best interest to opt in, but he or she likely doesn’t tell you it’s in the bank’s best interest for you to opt in.

What Does it Mean to Overdraft?

To overdraft means you don’t have enough money in your account to cover an ATM withdrawal, debit purchase, online payment, or transfer.

What Is Overdraft Protection?

If you opt into overdraft protection, you give the bank permission to pay for your transaction when your balance falls below $0, and then they charge you a hefty fee for doing so. The average overdraft fee is $34.21, according to Cushion’s analysis of more than one million overdraft fees. While there is a limit to how many overdraft fees the bank can charge you each day, you could still end up paying hundreds of dollars.

The FDIC reported that in 2019 U.S. banks made $233.1 billion in net revenue—or the amount after expenses, taxes, and other costs. The Center for Responsible Lending estimates nearly 5% of that can be attributed to overdraft-related fees, or more than $11 billion. Now does it make sense why banks would want you to opt in?

Luckily for account holders, it became mandatory in 2010 for banks to require customers to opt in before charging overdraft fees. Opting in still seems to be the default for people, but it’s not always the right choice. Cushion negotiates dozens of credit card and bank fees, more than 30% of which are allocated to overdraft-related fees.

Average Income of Top 3 U.S. Banks in 2019
Source: Center for Responsible Lending

7 Things to Remember

Your own financial needs and spending habits should determine whether or not you opt in. Here are some things you should consider.

  1. There are different types of overdraft protection.
    • Courtesy or standard overdraft protection: allows you to overdraft on ATM withdrawals and debit purchases. Fee charged with each transaction.
    • Linked account: allows you to link your account to another checking or savings account at the same institution. When you overdraft your account, the bank will transfer the amount from the linked account to cover the transaction. Fee charged with each transaction, though it is typically less than a standard overdraft fee ($10–$12.50).
    • Linked credit card: allows you to link a credit card to cover the transaction. Typically includes a fee plus interest.
    • Overdraft line of credit: a loan that covers the transaction. Typically a fee plus interest.
  2. Some banks don’t charge you an overdraft fee if you overdraft by a small amount. The limit is typically $5—anything more and you can expect a fee.
  3. Opted-in accounts typically pay more on bank fees than accounts that aren’t opted in. A 2014 study by the Consumer Financial Protection Bureau found that opted-in accounts pay on average $21.61 per month on overdraft and NSF fees compared to $2.98 per month for accounts that aren’t opted in.
  4. You’re not exempt from overdraft fees if you aren’t opted into overdraft protection. You could still be charged an overdraft fee for pre-approved purchases, such as checks and automatic payments. For example, if your rent is scheduled to auto-pay on the first of the month but you don’t have the funds in your account, your bank can charge you an overdraft fee even if you’re not opted in.
  5. If you don’t opt into overdraft protection, the bank could charge you a fee for non-sufficient funds, or an NSF fee, instead. Overdraft and NSF charges are typically the same amount, but there are differences between the two — most importantly, the bank will cover the transaction with an overdraft fee, whereas with an NSF fee, the bank will decline the transaction. Read more about overdraft and NSF fees here.
  6. You can opt into and out of overdraft protection at any time. If you opt in when opening your account and find yourself senselessly overdrafting, opt out to save yourself the headache. On the other hand, if you don’t opt in and have found yourself in situations where you needed funds on the fly but your card was repeatedly declined, opt in. Just remember to keep an eye on your account balance so it doesn’t stay overdrawn for too long, or doesn’t get too far into the negative.
  7. If your account is overdrafted for an extended period of time, the bank can close your account. This could make it more difficult to open an account at another financial institution in the future. A bank’s decision to close an account depends on:
    • The bank’s policy
    • Amount of time the account has been overdrawn
    • Size of the overdraft
    • The account holder’s banking and overdraft history

So should you opt in or not? Like most things related to finances, it’s entirely dependent on your own situation.

Consider opting in if…

  • You’d like the peace of mind knowing you can withdraw money or make a purchase even if the funds aren’t currently in your account. This could be particularly helpful in emergency situations—replacing a flat tire, buying groceries, or paying for a visit to urgent care out of pocket.
  • You occasionally don’t have enough money to pay essential bills. For instance, the average U.S. gas bill is $72.10, according to Move.org. If your bank charges $35 for an overdraft fee, you’ll pay 48% more on your gas this month, but it would probably be worth it not to have your gas shut off. Just replenish your account as soon as possible, and make sure you’re ready for the next payment so you aren’t charged another $35.

Consider not opting in if…

  • You don’t have a lot of essential bills to pay.
  • You’re trying to manage your spending.
  • You’re an avid user of mobile banking or text message alerts. If you always tend to know how much is in your account or have alerts sent when your balance is low, you can transfer funds before your balance ever reaches $0.

Last Updated on September 19, 2023