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What is overdraft protection and how does it work?

To understand overdraft protection, it's essential to first understand what overdraft is on a bank account. Overdraft occurs when you don't have enough money in your bank account to cover your withdrawal transactions. In these cases, a transaction may or may not be completed depending on the financial institution.

When an overdraft occurs, credit unions and banks charge overdraft fees as a penalty for overdrawing your account.
Overdraft protection is a service offered by credit unions and banks to help you avoid overdrafts on your account. There are several types of overdraft protection options that credit unions and bank offer, so if an overdraft should occur the money needed to complete the transaction is covered.
Some credit union and banks will offer a "courtesy pay option," which means they will cover the overdraft amount so your transaction will go through. Some banks charge an overdraft protection fee for the service.
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Types of overdraft protection

There are different types of overdraft protection available at most banks, credit unions, and other financial institutions. Here is an overview of each:
Opt-in overdraft protection. When you opt-in for overdraft protection, your financial institution will pay for your transactions to go through, essential covering you for the amount that is over the amount you have in your account. There is typically an overdraft protection fee for this service.
Linked bank accounts. This option lets you link a savings account or other account to your checking account, so your transactions are completed using money from the linked account.
Credit cards. Some financial institutions let you link a credit card to your checking account to cover the balance of the overdraft. There may be an overdraft protection fee for this service, which will be charged to your credit card.
Line of credit. Some financial institutions offer a line of credit that will be drawn from in the event you are making a withdrawal transaction that cannot be covered by the balance in your checking account. The bank will transfer money from your line of credit into your checking account. Interest will be charged on the overdrawn amount until you pay it off.

Advantages of overdraft protection

Avoid declined transactions. Choosing overdraft protection means your transactions will always go through, whether you're withdrawing money from your account at an ATM or the money is being withdrawn as an ACH (automatic payment) transaction.
Cheaper than paying an overdraft fee. Fees charged for the various overdraft protection services offered by credit unions and banks are typically less than the overdraft fees charged to people who are not participating in one of these services.
Emergency coverage. Overdraft protection provides peace of mind that you'll be covered if you need to withdraw a large sum of money in an emergency.
Convenience. It's easy to sign up for overdraft protection when first opening your account or at any time thereafter.

Disadvantages of overdraft protection

Overdraft protection fees. Although fees are less than the penalty fees for not having protection, overdrawing your account will come at a cost.
Potential to rack-up debt. If your bank is covering the overdraft or you have an overdraft line of credit, there's a chance your debt can add up if those fees aren't paid back on time or you fail to replenish your checking account and continue to overdraw.
False sense of security. Knowing that all your withdrawal transactions are covered could lead to overspending.
Can lower your credit score. Failure to repay any fees or debts owed to your financial institution will be reported to the credit reporting agencies, which will lead to a reduction in your credit score.

How to avoid overdraft fees

Track and monitor your spending. The easiest way to avoid fees is to make sure you don't spend more money than you have and always keep enough money in your checking account to cover your daily and monthly bills and other expenses.
Maintain a minimum balance. All financial institutions have minimum balance requirements, and a fee may be charged when your balance falls below that mark. Keeping the minimum balance and a buffer to cover your bills will help you avoid going into debt.
Enable alerts and notifications. Sign up for text and email alerts and notifications that will tell you when your account is nearing the minimum balance requirement.
Link to another account. Linking your checking account to your savings account for overdraft protection is an easy solution to the overdraft problem if you maintain enough money in your savings account to cover the overdrafts.
According to the Consumer Financial Protection Bureau, for one-time debit card transactions and ATM withdrawals, banks and credit unions cannot charge you an overdraft fee unless you opt in.


Is there a limit on overdraft fees?

Federal laws do not specify maximum amounts for fees that banks can charge for overdrafts.

How much can I overdraft?

Each financial institution has its own overdraft thresholds.

Can a bank or credit union refuse to cover overdrafts?

Yes, a financial institution can refuse to cover overdrafts unless you opt-in to one of its offered overdraft protection services.

How much does overdraft protection cost?

Each financial institution will have its own fees associated with overdraft protection. Ask to see the fees list when signing up for your account. Fees are also published on the bank's website.

Does overdrafting hurt your credit score?

That depends on how the fees are covered (by your linked account or by the bank) and if you repay the fees on time. Failure to pay back any fees owed to your bank can result in a drop in credit score.

Can you opt out of overdraft protection?

You have the option to opt out of overdraft protection services. However, if you do overdraw your account, your withdrawal transactions may not be completed, and you will have fees and penalties to pay.

Can you overdraft a debit card with no money? 

Debit cards are typically linked to a checking account. If you are using a debit card to make a purchase and there is no money in your checking account, this will cause an overdraft unless you are signed up for an overdraft protection service which will allow the transaction to be completed.

Why savvy consumers choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

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Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


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